Alphabet Is Still Worth a Look Since It’s Best Prepared for Ad Recession

Stocks to buy

While Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has rallied nicely — along with the other mega tech operators like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) — the shares are still about 18% off their highs. It was back in March that GOOG stock was at $1,532. Now it’s at $1,249, putting the market capitalization at $857 billion. Then again, the company’s core business of advertising is certainly vulnerable. This is an expenditure that is easy to cut off. For example, during the recession of 2009-2010, Google did report slowing of its revenue growth.

GOOG Stock Is Still Solid Since Alphabet Is Prepared for an Ad Recession

Source: turtix / Shutterstock.com

But of course, with the impact of the novel coronavirus, things will certainly be much worse this time around. According to the International Monetary Fund (IMF), the global economy will suffer a 3% drop in GDP this year. Keep in mind that — in January — the forecast was for 3.3% growth. The IMF’s chief economist, Gita Gopinath, said: “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.”

While other internet companies like Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) have announced warnings, this has not been the case with Google. But this should not be a sign that the company is somehow immune. For the most part, there will be considerable erosion of the revenue base, especially from customers in hard-hit industries like travel and restaurants.

So what does this mean for GOOG stock? Should it be avoided right now? Not necessarily — so long as you plan to hold on for at least a year or so. Let’s see why.

Offsetting Factors

Over the years, Google has been expanding into non-advertising sectors. For example, its cloud business. As companies have been forced to make their workforces remote, this has created substantial demand for online collaboration and productivity tools.

Just look at the Meet Application, which is a video conferencing system and is part of the G Suite. As should be no surprise, the usage has surged, with more than two million new users connecting every day and logging more than two billion minutes. Note that G-Suite has hit six million paying users.

But this is just one part of Google’ Cloud business. The company has been aggressively investing in enterprise solutions, such as with the acquisition of Looker (which is a business intelligence platform). At the end of last year, the cloud business had a run-rate of $10 billion, up 53%.

The AI Factor

Another important driver for GOOG stock is its AI (Artificial Intelligence) business. CEO Sundar Pichai often considers his company as pursuing a strategy of “AI first.”

Actually, this technology has been at the core of the company from its early days. Google really had no choice because — in order to scale its search engine — there was a need to pursue cutting-edge areas of AI like deep learning. But there have also been notable moonshots, like Waymo. The company’s self-driving cars have driven 20 million miles across more than 25 cities.

In fact, Waymo itself could be worth over $100 billion.

Google has also been building a strong AI platform for the healthcare industry. This has involved building tools to help improve drug discovery, clinical trials and diagnostics. No doubt, innovations with these areas could lead to multi-billion dollar opportunities.

Note that during the latest earnings call, Pichai said: “Our thesis has always been to apply these deep computer science capabilities across Google and our Other Bets to grow and develop into new areas. The Alphabet structure allows us to have a portfolio of different businesses with different time horizons without trying to stretch a single management team across different areas.”

Bottom Line On GOOG Stock

Even though the ad business is likely to falter in the coming months, there will still be continued growth in usage of consumer Google properties like YouTube. If anything, this will ultimately help create even more engagement, so when advertising starts to perk up, the revenues should snap back fairly quickly.

Here’s what Citi analyst Jason Bazinet had to say about GOOG stock: “We expect Google to have a greater near-term disadvantage but also have a faster recovery as pandemic effects reduce … We believe Alphabet will be more resilient vs. Facebook in weathering the advertising decline due to its lower exposure to the [small business] advertiser base.”

And I think he’s right. So long as you have a longer-term view of things, GOOG stock looks like a good bet.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.

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