Fears of a trade war with China, coupled with the specter of an upcoming recession, have hit the market hard. But shares of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) have so far managed to stay afloat, falling from a 52-week high of $1,289 down to a recent close of $1,164. This modest fall of just under 10% shows just how resilient Alphabet stock is.
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With last week marking the fourth anniversary of the creation of Alphabet stock, which has Google as its core operating unit, there is still plenty of gasoline left in the tank.
The restructuring of the company separated the core internet business, www.Google.com, from the peripheral mega-tech moonshots, which may take a decade or more to pay off. Whether its self-driving vehicles, artificial intelligence or healthcare, buying Alphabet stock is like placing many different bets on many different areas of the global economy that technology will re-invent. At the same time, GOOGL’s core business generating internet advertising revenues remains rock-solid and growing.
With all of that in mind, here are three key reasons why GOOGL stock is a strong buy.
GOOGL Is Unaffected by the Threat of a China Trade War
The bulk of Alphabet’s revenues are generated in Western economies, particularly North America and Europe. Advertising sales in these markets are not affected by a slowdown in exports to China nor increased tariffs of cheap Chinese imports.
Goldman Sachs has recommended a service sector strategy, as opposed to goods manufacturers, for investing around the threat of a trade war.
“Services stocks have less exposure to trade conflict given they have lower foreign input costs that might be subject to tariffs and lower non-US sales than Goods firms,” said Goldman Sachs strategist David Kostin.
In his client note, Kostin recommends buying stocks such as Alphabet as well as Microsoft (NASDAQ:MSFT), JP Morgan Chase (NYSE:JPM) and Amazon as a part of a greater strategy to circumvent trade war woes.
Alphabet Stock Is Backed by Strong Top Line Revenues
Google has consistently delivered growth in top lines revenues for the last five years. There is little reason why this trend will stop anytime soon.
Further, GOOGL posted net positive earnings every year for the previous five years. At the same time, GOOGL is heavily invested in moonshots that should help bolster the GOOGL stock price in the future when the ideas behind these businesses are fully realized and start to pay off. And many of these moonshots should pay off just when the internet sector becomes a mature industry, just like steel, autos and telecom from decades past with ever-dwindling profit margins.
This aspect alone makes GOOGL stock an appealing long-term stock to buy.
Google Cloud Is Driving Growth
Google cloud revenues are not broken down separately but instead reported within the broader Alphabet segment “Google Other Revenues.” While Alphabet management has made it clear that Google Cloud Services (GCS) is their fastest-growing business, they have not given specific numbers.
However, the management consulting firm Gartner estimates that the total global cloud market is expected to grow to $331.2 billion in 2022 at a CAGR of 16.1%. Google has invested heavily in cloud technology with many analysts estimating that GCS alone could generate $20 billion form Alphabet stock by the end of 2020.
Bottom Line on GOOGL Stock
Alphabet has covered the roulette table with chips. From their proven core business of internet advertising to the further-off possibility of autonomous vehicles — propelled by a dynamic cloud business in-between — Alphabet is undoubtedly holding out well in the current market storm.
When the selloff in tech stocks finally plays out, the GOOGL stock price could be set for a strong bounce back.
As of this writing, Theodore Kim did not hold a position in any of the aforementioned securities.
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