Shares are off quite a bit from all-time highs set last fall, but investors should still be thinking about buying US tech giant Alphabet Inc (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL), says portfolio manager Gordon Reid, who claims the stock ticks all the boxes.
“[Alphabet] is a pound-the-table buy. This stock has all the attributes to do well, long term,” said Reid, president and CEO of Goodreid Investment Counsel, who spoke on BNN Bloomberg on Friday.
Google parent company Alphabet is down over the past 12 months by about 22 per cent and has a year-to-date return of about 23 per cent. But that’s pretty well par for the course among the big American tech stocks and the technology sector in general. The tech-heavy Nasdaq Composite Index has recorded a 12-month return of negative 19 per cent and a year-to-date of negative 23 per cent. Those numbers compare to the wider S&P 500 Index which is down an easier eight per cent over the past 12 months and down almost 15 per cent year-to-date.
Alphabet has had its share of struggles of late, notably missing analysts’ estimates over the past two quarters. With much of its revenue coming from online advertising, Alphabet is prone to the ups and downs at the macroeconomic level. The company’s businesses like search and YouTube did exceptionally well during the pandemic as people the world over hunkered down and consumed more online content. But with the reopening of economies, Alphabet’s growth trajectory has flattened somewhat.
Take its latest quarterly earnings, where revenue grew a health 13 per cent year-over-year to $69.69 billion, with ad revenue up 12 per cent to $56.3 billion and YouTube revenue up five per cent to $7.34 billion. Earnings per share were $1.21, while analysts were expecting $1.28 per share. (All figures in US dollars.)
But those numbers pale in comparison with the Q2 2021, where overall revenue grew by 62 per cent and YouTube sales were up 84 per cent from a year earlier.
If not sounding the alarm, management has at least been more cautious in its convictions on the way forward. CEO Sundar Pichai recently said the company will be attempting to tighten its belt across all businesses in response to a less rosy economic picture.
Speaking at Code Conference in Los Angeles last week, Pichai said there’s a lot of uncertainty about the broader economic picture when it comes to factors such as advertising and consumer spending, with the company now attempting to find efficiencies in response.
“We want to make sure as a company, when you have fewer resources than before, you are prioritizing all the right things to be working on and your employees are really productive that they can actually have impact on the things they’re working on so that’s what we are spending our time on,” Pichai said, as reported by CNBC on September 7.
“Across everything we do, we can be slower to make decisions,” Pichai said. “You look at it end-to-end and figure out how to make the company 20 per cent more productive.”
But for Reid, the fundamentals on display with Alphabet are just too good for investors to pass up, and he says even the worry about GOOGL’s being a high-growth name within a rising interest rate environment doesn’t worry him.
“The long-term numbers on revenue growth, earnings growth, cash flow growth are north of 15 per cent — [which is] 5x what the economy is likely to do — yet it’s trading at less than 20x earnings,” Reid said.
“We know why it’s come down and it’s that interest rates are going up and growth stocks don’t do well in a higher interest rate environment because their future expected growth is discounted at a higher rate because rates are going up,” Reid said.
“[That’s] highly academic and I’d say somewhat misplaced in this case,” he said.
For a long time, Alphabet has also had many irons in the fire going beyond its main search engine business, from cloud computing and analytics to self-driving cars to its Android, Chrome, hardware offerings. The company just spun out a communications technology company called Aalyria which offers fast and secure communications networks.
Reid says investors shouldn’t be worried about the drop in Alphabet’s share price, as the company and stock still have a long and profitable future ahead of them.
“We’re very, very strong on Google,” he said. “We don’t like the fact that sometimes our stocks for periods of time don’t do as well as we would hope, obviously. But we’re going to be very patient with this company and we’re long-term holders.”