My Only Mega-Tech Strong Buy

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My Only Mega-Tech Strong Buy
My Only Mega-Tech Strong Buy

Days after Snap Inc. (SNAP) reported dismal earnings following a pullback in advertising dollars and a challenging outlook, Alphabet Inc. (NASDAQ:GOOG), best known for its Google products and services including Android, Chrome, and Cloud services, missed earnings and revenue for the second consecutive quarter. Despite this miss, the stock is up nearly 5% post-market and remains a Strong Buy according to Seeking Alpha’s quant ratings.

 

Alphabet Stock Quant Ratings and Factor Grades

Alphabet Stock Quant Ratings and Factor Grades (Seeking Alpha Premium)

 

Alphabet Inc.

  • Market Capitalization: $1.42T
  • Quant Rating: Strong Buy
  • Quant Sector Ranking (as of 7/26): 10 out of 249
  • Quant Industry Ranking (as of 7/26): 3 out of 62

Economic uncertainty is weighing on the tech behemoth’s financials and outlook, as weak results, primarily in the form of limited advertising dollars, led to lower numbers. Many companies within the tech sector are struggling to grow their advertising dollars and revenue. Yet, Alphabet managed to grow its advertising revenue 12% year-over-year to $56.3B, driven by travel and retail. Its YouTube advertising revenue of $7.3B is up 5%, and network advertising revenue was up 9%. “The quarter-on-quarter deceleration in both YouTube and network advertising revenues primarily reflects pullbacks in spend by some advertisers,” said Ruth Porat, Alphabet CFO.

 

Google Advertising Revenue Chart

Google Advertising Revenue Chart (CNBC)

 

Despite the market volatility and prospective headwinds prompting the decline in advertising, a strong U.S. dollar and weakening demand is forcing Google to be more strategic in an effort to grow and remain profitable.

A strong U.S. dollar can negatively impact revenue streams from international sales, but much of Google’s earnings decline is attributable to hiring 10,108 new staff in Q2 for technical roles in its commitment to strategy, engineering, and the future.

“As ad sales slow for many companies, Google has consistently pulled in positive ad revenue by shifting its focus toward areas where the company can be sharper…Google’s consumer data, along with retailer partnerships, can help it better brace for an e-commerce slowdown,” said Scott Sullivan, chief revenue officer at Adswerve, an online advertising company.

Google is focused on technical aspects and is dedicated to its future. With three times the cash reserves of rival Apple (AAPL) and one of the best balance sheets worldwide, Alphabet’s market value and outlook is very attractive.

Alphabet Stock Growth and Profitability

With Q2 EPS of $1.21 missing by $0.08 and revenue of $69.69B missing by $111.87M, the company’s weaker than expected earnings were not as bad as anticipated. CPI is at 9.1%, and consumer spending is experiencing a pullback as stagflation and recession talks persist. And while Google’s pullback in advertising revenue is feeling the effects, the company remains highly profitable, even as currency fluctuations pose headwinds.

 

Alphabet Stock Profitability Grade

Alphabet Stock Profitability Grade (Seeking Alpha Premium)

 

According to Ruth Porat, currency fluctuations have created a 3.7% reduction in revenue growth given the strengthening dollar. As a result of the dollar’s strength, the next quarter’s results could see an even bigger decline in revenue resulting from “uncertainty in the global economic environment. And then, there are issues that differ across industry. You’ve seen it in the news for some of supply chain, for some of its inventory issues.” –Porat.

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But substantial cash from operations, tremendous EBIT margins, and underlying growth and profitability metrics allow Alphabet to remain a strong buy. Its significant free cash flow of $16.5B allows shareholders to finance buybacks. Alphabet has managed to aggressively repurchase its shares. Given its ability to strategically position itself to capitalize on unique opportunities that include diverse product and service offerings that set it apart from competitors, the company may be able to continue a ramp-up in buybacks going forward. As Seeking Alpha Marketplace author Jonathan Weber writes:

“I do believe that Alphabet is a very solid company with a positive long-term outlook, and the current valuation is attractive. I also believe that there is a good chance that investors will be happy when buying at current inexpensive prices, especially when management follows through with its headcount adjustments that should make margins improve again.”

Alphabet Stock Valuation & Momentum

Although the IT sector is concentrated and many popular names possess stretched valuations, Alphabet is trading at 52-week lows. While its D valuation grade is not ideal, its forward P/E ratio of 19.56x is only a 6.5% difference to the sector. Its forward PEG of 1.04x, an important metric that blends value and growth, is a -27.56% difference to the sector. While Alphabet is relatively expensive compared to the sector, its YTD share price decline of 27% and one-year price decline of 21% is appealing to some investors looking to buy it near its low. Coupled with a gradually rising quarterly price performance and bullish momentum, this stock looks very attractive, which is why our quant ratings recommend it as a strong buy.

Google It! Alphabet Is Rated a Strong Buy

Even in this volatile market, some tech stocks can be great buys if you consider the macro environment, and identify those with solid fundamentals and capitalize on their growth and momentum. Investors love tech stocks, and fortunately, Alphabet is the only popular mega-tech name rated a strong buy according to Seeking Alpha’s quant ratings. Alphabet’s products remain in high demand, and the stock possesses forward EBIT growth of +65%, which is an incredible growth rate.

In the current environment where the tech sector is -21% and Alphabet is trading near its 52-week low of $102.21 per share, it offers a unique opportunity to buy a tremendous company at a low where your portfolio has the opportunity to capitalize on potential upside. In addition to Alphabet, we have dozens more Top Technology Stocks for you to choose from. Our quant grades and investment research tools help to ensure you are furnished with the best resources to make informed investment decisions.