Investors have not been easy on big tech in recent times. If you owned all of the FAANG stocks — which is an acronym used to describe five prime U.S. tech companies — in equal weights, your portfolio would be down 25.9% over a six-month span. That’s a very subpar performance compared to the S&P 500‘s negative 9.8% return in the same time frame. In response to off-the-charts inflation and the Federal Reserve’s combative interest rate hikes, there has been a massive shift out of growth names and into less risky assets like value stocks and bonds.
The present-day economic backdrop doesn’t favor technology stocks, which has been evident in many companies’ latest quarterly reports. Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), the parent company of the popular search engine Google, posted its second-quarter digest on July 26, prompting many investors to tune in to see how the company has held up in an ebbing digital ad market. Given that the tech giant’s stock price has contracted 19.8% since the start of 2022, is now an optimal moment to climb on board?
What’s the latest with Alphabet?
In its second quarter, the search engine operator’s total revenue grew 12.6% year over year, up to $69.7 billion, and its diluted earnings per share sank 11% to $1.21. The company’s Google advertising business rose 11.6% to finish at $56.3 billion, and its Google Cloud segment continued to demonstrate impressive growth, expanding 35.6% to $6.3 billion. Meanwhile, its operating profit margin fell to 27.9% from 31.3% in the same quarter a year ago.
The company’s remarkable top-line performance in 2021 will create unfavorable comparable metrics on year-over-year growth rates, especially given the current slowdown in the digital advertising market. But although the tech leader missed Wall Street’s revenue and earnings forecasts, I think the company’s Q2 performance was a net positive overall. Not only was its advertising revenue growth still in the green, unlike other ad-driven businesses such as Meta Platforms and Snap, its cloud business continued to forge ahead in a major way.
Analysts on Wall Street expect Alphabet’s revenue to climb 12.6% year over year in fiscal 2022, and its earnings per share to decline 7.7%. In fiscal 2023, which is when comparable metrics will improve, analysts forecast top- and bottom-line growth of 12.3% and 15.6%, respectively. Right now, the stock has a price-to-earnings multiple of 21.1, a big haircut from its five-year average of 32.4. When one of the world’s most prominent businesses moves so far off its historical valuation, investors should take note. Given its fresh earnings digest, it’s hard to justify Alphabet’s steep pullback year to date. In my opinion, the company’s business has demonstrated noteworthy resiliency, and once macro conditions turn the corner, it’s well positioned for continued growth.
Is it buy time?
Yes, now is a great moment to purchase shares of the technology titan as long as you’re able to grapple with near-term headwinds. Technology investors are currently living in a buyer’s market. In other words, now that many world-class stocks are trading at historically low valuations, it’s time to accumulate shares. That’s certainly the case for Alphabet right now — prudent investors shouldn’t hesitate to buy this stock at existing levels.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Luke Meindl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), and Meta Platforms, Inc. The Motley Fool has a disclosure policy.