Being one of the largest companies in the world hasn’t been able to safeguard Alphabet (NASDAQ:GOOGL) from various headwinds that have bothered the world this year. However, despite several bumps on the road, we think Alphabet is a long-term winner. Here is a demand-side-focused discussion on the pros and cons of the business to better understand where the company is headed.
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Slowing Ad Demand
Search all you may, but you will not find a more widely used search engine than Google. Google has been enjoying the bulk share of global digital advertising spending for the past few years now.
However, with the relentless inflation, ongoing war and war-like geopolitical situations, rising interest rates, and slowing economies, global spending has now narrowed significantly, which is enough to threaten Alphabet’s management about its repercussions.
Further, foreign exchange headwinds have put pressure on the company’s ad revenues, a large chunk of which comes from outside the U.S.
Nonetheless, at least for Q2, Google’s ad revenues continued to remain robust in the face of demand pullbacks in spending by advertisers, especially on YouTube.
Lower Spending Across Platforms
Most of the decisions to purchase a product or service start from a simple internet search (of which Alphabet is the leader). However, inflation has shrunk pockets across the globe.
The lower engagement level among users was a major cause of reduced spending on products and services in the second quarter. This, along with elevated costs of running Google Services was tough on the company’s operating margin last quarter.
However, looking closely, the slowdown in buying activity on Google is not just a result of futuristic hedging activity. Economies opening after COVID-led shutdowns have led to a drop in engagement among users on the Google platform.
The lower buying activity seems to be normalizing to pre-pandemic levels, rather than only being a result of an impending concern. July’s cooler inflation rate may have a positive impact on the trend, which can be sustained if the inflation keeps responding to the Fed’s monetary tightening policy.
Ergo, there is not much to worry about in this area either. Moreover, massive resources available at Alphabet’s disposal will ensure a better recovery than most of its rivals.
Is Google a Good Stock Investment?
Solid efforts to boost advertiser experiences across all its platforms are helping analysts to shut out the noises, keeping a Strong Buy consensus rating on the stock, supported by 30 Buys and two Holds. Moreover, Alphabet’s average price target of $142.63, reflecting an upside of 22% from current price levels, is another point that makes the stock look attractive.
Further, investors are also optimistic about the company’s prospects, despite the worrisome trend in ad spending. The number of portfolios on TipRanks holding GOOGL stock has gone up 0.2% in the past week and 2.5% over the last 30 days.
Everyone seems to be positive that no matter how much ad spending tumbles, Alphabet will still get to enjoy most of the pie.
Concluding Thoughts
A recent Dentsu Global Ad Spend Forecasts report says that global ad spending is expected to grow 8.7% year-over-year in 2022, 5.4% in 2023, and 5.1% in 2024. This is good news for Alphabet, which sits at the top rung of those poised to benefit from the predicted growth. Moreover, with the Fed’s crackdown on inflation, normalcy in the inflation rate will be beneficial for demand as well as ad spending, if we, for a moment, keep aside the risk that comes with higher interest rates.
Also, even if advertising budgets are trimmed in the event of a recession, Google search is expected to remain resilient.
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