To The Moon

This beaten-down growth stock could be poised for a rebound.

With dominant positions in massive markets like internet search and video streaming, Alphabet (GOOGL)(GOOG) stands as a titan in the advertising industry. The $1.2 trillion behemoth also has intriguing growth potential in other fast-growing markets, such as cloud computing and artificial intelligence (AI).

Yet, like manytech stocks, Alphabet's shares have been down sharply in 2022. Could this be the buying opportunity investors have been waiting for?

The bull case for Alphabet's stock

The digital advertising market is projected to grow from $537 billion in 2021 to more than $1 trillion by 2027, according to Statista.

IMAGE SOURCE: STATISTA.

Alphabet's Google is particularly well-placed to profit from the growth of this massive global market. Google commands a greater than 90% share of the worldwide internet search industry, which is the largest segment of the digital ad market. Search advertising is projected to exceed $435 billion by 2027, up from $225 billion in 2021.

YouTube gives Alphabet's investors another powerful way to profit from the long-term expansion of the digital ad industry. The leading video-sharing platform should capture the lion's share of a video ad market that's forecasted to grow from $150 billion in 2021 to nearly $320 billion by 2027.

Alphabet also has a massive growth opportunity in the rapidly expandingcloudinfrastructure market. Google Cloud is currently No. 3 in this booming industry, behind Amazon's(AMZN) AWS and Microsoft's (MSFT) Azure. But it's growing faster than its larger rivals, due partly to its AIexpertise. Google Cloud's revenue soared 38% year over year in the third quarter, while Azure's and AWS' sales increased 35% and 27%, respectively. With the cloud computing market expected to surpass $1.5 trillion by 2030, according to Grand View Research, Google Cloud is likely to be a key driver of Alphabet's long-term expansion.

Yet despite these impressive growth drivers, Alphabet's stock is currently trading for a bargain price. Following its 33% decline so far in 2022, the tech giant's shares can be had for less than 20 times trailing-12-month earnings and about 18 times analysts' profit estimates for 2023. That's an attractive price for a high-quality, competitively dominant business with a strong chance of growing earnings per share at a double-digit annual pace in the coming decade.

Risks for investors to consider

Alphabet's long-term future is bright. Its near-term prospects, however, are a bit rocky. Alphabet's revenue rose only 6% in the third quarter, as inflation concerns and recession fears drove many companies to pull back on their ad spending. That was a marked deceleration from the 13% growth the company generated in the second quarter and the 41% surge it experienced in the prior-year period. To weather the downturn, Alphabet is slowing its pace of hiring and prioritizing expense management, which should help to bolster its profitability.

TikTok's surging popularity is a more worrisome threat. The social media app is gaining new users at a rapid clip and pulling ad dollars away from YouTube. YouTube has rolled out shorter video formats that have proven popular with TikTok's users, and the early results are promising. But this is a battle that investors should watch closely.

It should also be noted that Google Cloud is not yet profitable. Amazon's AWS, meanwhile, produced $5.4 billion in operating income in the third quarter alone. Analysts expect Google Cloud to achieve sustained profitability in the coming years, but Amazon and Microsoft aren't going to make it easy.

So, is Alphabet's stock a buy?

These risks posed by TikTok, Amazon, and Microsoft are arguably already reflected in Alphabet's discounted stock price. Moreover, even if we experience a recession, the economy will eventually rebound. The current downturn in the ad market should thus prove temporary.

Google's dominance in the search market and YouTube's leading position in video streaming should persist in the long run. These two markets alone should be enough to fuel solid increases in Alphabet's sales and profits for many years to come. The tech giant's stock, therefore, looks like a great buy today.

Source: The Motley Fool

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