Alphabet Stock Forecast 2023

Alphabet Stock Forecast 2023

Latest Stock Price

Alphabet Stock Forecast: Stock Performance

  • Last 5 days – (3.9%)
  • Last 1 Month – (-0.59%)
  • Last 6 Month – (-15.7%)
  • YTD – (-32.2%)

Shares of Alphabet and Apple Inc moved in the opposite direction after their latest earnings report in late October. Apple did beat the market expectations for both top-line and bottom-line growth and hence shot up 8% on October 28th, 2022. However, Alphabet’s stock tumbled 9% on disappointing results. 

It also tells one thing that the market is in no mood to tolerate any earnings misses, be it a start-up or a trillion-dollar company like Alphabet. But there is no doubt that Alphabet has built the world’s largest advertising business and its monopoly is not going to die soon. 

So, just like any stock, there are some positives and negatives with Alphabet stock. We are going to discuss these in detail in this article and will try to make a wise decision toward Alphabet as an investment for 2023.

Alphabet Stock Forecast: Bull Case

Google Cloud – While Alphabet’s third-quarter results were lukewarm, there were few bright spots in the results. Google Cloud is the flag bearer from Alphabet in the red-hot cloud computing market. Google cloud revenue has been rising at jaw-dropping levels. This year the revenue has already hit $19 billion, a 39% YoY growth rate. Google cloud revenue of $24.5 billion over the trailing 12 months has surpassed IBM’s $22.2billion over the same time.

The Cloud computing market is expected to grow from $405.7 billion in 2021 to $1.7 trillion by 2029 and has a CAGR of 20% over the next seven years. Google cloud is already capturing this market and is ranked third among the cloud computing companies. Alphabet also acquired, cybersecurity firm Mandiant at $5.4 billion to strengthen Google Cloud’s security and identify threats and vulnerabilities.

Although Google Cloud is not generating net positive income right now and has given a negative 10% return in the third quarter of 2022, it is growing its top line at a healthy rate and its path and its competitor Amazon Web Services is putting 30% profit margins, so there is no reason Google Cloud won’t get close to that. In 2023, Google cloud is expected to continue the dream run and turn net positive income boosting Alphabet’s revenue and profitability.

Value investors must keep valuations in sight – While the short-term pessimism is justified towards Alphabet Inc, investors should not be doubtful of its long-term value. The recent sell-off has proved to be an opportunity for long-term investors to enter afresh in Alphabet. 

On both price-to-earnings and price-to-free cash flow basis, Alphabet is trading towards the lower end of 10-year values. It is only trading at 17 times forward earnings basis 16 times price to free cash flow. Another strong point is that Alphabet is generating strong free cash flow to fuel business growth. It generated a free cash flow of $63 billion in the trailing 12 months.

Google still has a firm grip on search engine domination- Google search contributes more than 50% of total revenue in each quarter.  Google search has a virtual monopoly in the search engine market and according to an estimate, the engine has more than 90% market share in the majority of countries (except China). Every year not only a few hundred million people start using the internet, but the time spent by the existing users is also increasing. This means an opportunity for Google to show more ads and increase revenue. Unless something drastic changes in the search engine market, Google’s dominance should continue in 2023 and lead to constant growth in revenue.

Alphabet Stock Forecast: Bear Case

Pessimistic Ad Industry- Advertising is still Alphabet’s bread and butter and there is no denying that the growth from ads is falling. This is primarily because of inflation. When the cost of goods and services is rising, advertisers are being more careful about ad budget allocation. The more worrisome sign is that the contribution of the advertising business overall Alphabet’s revenue is almost 80% and when the ad industry is facing headwinds, there is no denying that Alphabet will also face the heat. 

In the latest quarter’s earnings, Google ad contributed $54.5 billion out of Alphabet’s $69.1 billion. Also, this segment saw only 2.5% growth YoY, the slowest in the last few quarters. Also, it was the first time YouTube ad sales declined in a quarter YoY since Alphabet started to report its revenue separately in 2019. YouTube’s revenue declined about 2% YoY. There is little doubt that it is facing stiff competition from ByteDance’s TikTok 

The impact of the advertising industry was seen on operating income also in the third quarter which dropped 19% YoY to $17.1 billion.  The operating margin was also 25%, down from 32% in the same quarter last year. Headwinds faced by Alphabet in the advertising business are not going to slow down any time soon. With Fed increasing the interest rates in every meeting and recessing impending, 2023 can prove to be a very tough year for the advertising business and more so for Alphabet Inc.

Lack of diversification from Alphabet Inc- If we compare Alphabet Inc with Apple Inc, investors are most likely to choose Apple Inc in macro uncertain situations, because Apple has more diversified business than Alphabet. While Apple generated 79% of its revenue from selling hardware like iPhones, and iPads and the remaining 21% from its Services businesses, Alphabet generated 79% from its advertising business and only 10% from its growing Google cloud business. Alphabet’s lack of diversification in other services and overdependence on advertising is hurting its top and bottom line.

Also, a stronger dollar is hurting Alphabet as more than 50% of revenue comes internationally. Keeping 2023 into perspective, the dollar is likely to remain at a much stronger level compared to other currencies and it may thwart the company’s revenue growth.

Conclusion: Final Thoughts on buying Alphabet’s share in 2023

Let’s face the truth first. Alphabet has performed poorly in 2022, majorly due to dependence on ad business and macroeconomic factors. Can these factors continue in 2023, maybe, yes? As the US economy approaches 2023, there is a far greater chance of recession. 

But Alphabet has weathered major economic storms in the past like the 2000 dot com bubble or 2008 financial crisis and has come out of it even stronger. Google cloud is on the right track to contribute significantly in 2023 and so does the Google search engine. 

The balance sheet looks very strong with strong cash flows. 2023 can prove to be a neutral year for Alphabet at worst, but let us catch the big fish while it is still below $100.

Note: Crowdwisdom360 collates Predictions and data from all over the net and has no in-house view on the likely trends in the Stocks or Crypto Coins. Please consult a registered investment advisor to guide you on your financial decisions.

Vineet

Vineet

Vineet Agarwal is a trained technical analyst and avid stock trader. A graduate from a Top Technology Institute, Vineet carries out extensive technical and secondary research for this authored stock forecasts.