Don’t worry about Alphabet, this investor says

It’s been a terrible 12 months for fans of big American tech, and that includes Alphabet (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL), which is down by about a third over that stretch, as the market pulls back on worries about growth in the online advertising business, GOOGL’s bread and butter. 

But according to portfolio manager Paul Harris, digital advertising still has too much of a runway for investors to worry about a behemoth like Alphabet.

“It’s Kleenex, basically,” says Harris, partner at Harris Douglas Asset Management, who spoke on a BNN Bloomberg segment on Thursday. 

“It’s a great business because it’s a search marketing platform for advertisers and merchants, and that [industry] is not going to change. Online advertising will continue to grow,” he said.

The knives came out for Alphabet last month when the company missed on top and bottom lines in its latest earnings report, with ad revenue from YouTube actually falling two per cent year-over-year to $7.07 billion. Overall, Alphabet saw revenue growth of just six per cent compared to 41 per cent a year earlier, as slumping macroeconomic conditions impacted businesses and their willingness to spend on advertising across Alphabet’s platforms.

Alphabet management’s quarterly comments emphasized the company’s focus on prudent investment in new products and in high-growth areas of the Alphabet ecosystem.

“Financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud, while affected by foreign exchange. We’re working to realign resources to fuel our highest growth priorities,” said CEO Sundar Pichai in a press release.

For Harris, Alphabet’s fundamentals continue to be strong, despite the lull in the ad market.

“The stock trades at 18.6x earnings with no debt and it throws off $54 billion in free cash flow. They have 30 per cent of the digital ad market and I think that’s getting better because Meta Platforms is having a difficult time on the ad side,” Harris said.

“Digital advertising is going to be about a $400-billion business in 2024, and so the numbers are quite huge for them. I think they can continue to do that,” he said.

Harris said that while platforms like YouTube are down on a comparative basis, as the pandemic saw a big increase in eyeballs glued to screens, but he says YouTube is basically peerless in its business.

“YouTube is a great franchise. If you want to learn how to put up drywall or boil an egg, you go to YouTube, right? So, to me, it’s going to take some time to get back to those [pandemic] levels, but I think they eventually will,” he said.

“I like the story here. I think it’s not an expensive stock and you’re getting a company that can actually grow quite rapidly,” he said.