The widely followed S&P 500 index recently joined its technology-focused counterpart, the Nasdaq-100, in bear market territory. Both have been sliding since December 2021, and investors are reeling from steep losses in individual stocks that exceed 80% in some cases, particularly in the tech sector.
The U.S. economy sits at an important crossroads. Inflation recently hit a 40-year high, and the Federal Reserve is on a mission to cool prices by aggressively hiking interest rates. In its June meeting, the Fed lifted the benchmark rate by 75 basis points, which was the largest single increase since 1994.
Understandably, investors might be looking for the best place to shelter their money from further losses in the short term, and there are some great options. But it’s always more beneficial to focus on the long term because the economy, and the market, will eventually pick up steam once again.
One of the sectors most sensitive to changes in economic activity is advertising. Businesses invest more money to attract customers when the economy is good, and they pull back when things slow down. That’s why Google’s parent company, Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), might be one of the best picks to own when the current pessimism flips to optimism.
The stock split
First, let’s address Alphabet’s stock split, which has put the company in the headlines this year. When a company grows over long periods of time, its stock price often rises, sometimes into four-figures-per-share territory. This can make it expensive for smaller investors to own. A retail investor would have to pony up $2,142 to buy a single share of Alphabet right now, for example, so the company has opted for a 20-for-1 split.
It will increase the number of shares in circulation by 1,900% while reducing the price per share to one-twentieth its original value. The split will take effect on July 15, but if it were to happen today, Alphabet’s stock price would shrink to roughly $107.87.
It’s important to note that stock splits don’t add any real value to the underlying company; they’re purely cosmetic. Though if there is any benefit, it’s that Alphabet’s shareholder base might broaden to include more retail investors, which could boost its overall value in the short term. But in reality, the only thing that can deliver gains for Alphabet’s investors is sound business performance, and the company has that in abundance.
Growing beyond Google
Google’s popularity as a search engine is evident by its 92% share of all internet search globally. It remains core to Alphabet’s foundations, particularly on the financial side, as the advertising dollars generated by search account for over half of the company’s total revenue. And despite difficult economic conditions in 2022, the segment still grew 24% year over year in the first quarter.
But Alphabet gets notable contributions from its other business units like YouTube, its cloud computing division Google Cloud, and its hardware products like the Pixel smartphone and the Nest series of home devices.
YouTube is one of the company’s most interesting opportunities right now. Social media is being dominated by the short-form video format, led by ByteDance‘s TikTok, which has been the most downloaded app globally for the last three years. To compete, Alphabet launched YouTube Shorts two years ago, and it has taken off like a rocket, amassing 1.5 billion monthly active users already. Estimates suggest that figure places it on level ground with TikTok.
YouTube has generated $29.7 billion in revenue over the last 12 months, or about 10% of Alphabet’s total. But since the short-form video is most popular among younger users aged 16 to 24, YouTube Shorts could breathe new life into the platform. Young consumers are a coveted audience for businesses, so this could be a big opportunity for YouTube to expand its revenue base further as the economy recovers.
Alphabet stock is a great value
Alphabet generated $76 billion in net income during 2021, or $112.20 per share. Analysts expect that figure to fall modestly in 2022 to $111.52 amid tougher economic conditions, but that places Alphabet stock at a very attractive forward price-to-earnings multiple of 19.2.
It’s a slight discount to the Nasdaq 100’s forward multiple of 19.8, which might be an opportunity for investors to buy the stock now, because Alphabet’s earnings are expected to return to growth in a big way in 2023 to over $132 per share.
Keep in mind that after July 15, investors will need to divide the above EPS figures by 20 to adjust for the stock split.
Alphabet’s advertising-focused businesses might be among the best performers when the market recovers, given their sensitivity to economic growth. But those gains will be captured now while the stock is down 28.4% from its all-time high, so investors should consider moving quickly. Waiting until 2023 might result in the chance being missed.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.