Alphabet's Commercial Ventures Are Thriving, Yet Potential Challenges Might materialize for the Shares
Google's Parent Company, Alphabet (GOOG 1.26%, GOOGL 1.23%), has reigned supreme in the advertising market for years due to its renowned Google Search engine. However, with the advent of AI and chatbots, and a recent antitrust judgment, the company's future is shrouded in uncertainty, causing concerns for investors.
Despite the challenges, Alphabet has been thriving, with its stock witnessing a substantial growth of about 29% heading into Tuesday's trade. The tech giant continues to be a relatively inexpensive investment choice in the tech sector.
The question remains, is Alphabet a sound investment, or is the risk surrounding the company too high for a long-term, secure investment?
Alphabet Surpasses Estimations in Q3
In spite of the recent apprehensions, Alphabet's financial standing appeared robust when it reported its Q3 earnings in October. In the last quarter, ending September 30, the company reported impressive figures, with revenue growing by 15% to $88.3 billion, surpassing analyst predictions of $86.3 billion. Furthermore, its earnings per share of $2.12 comfortably outpaced Wall Street's projection of $1.85.
The company's performance indicates a strong foundation, with AI being utilized to bolster its services for consumers. Based on its recent results, Alphabet appears unaffected by any significant obstacles or adversity.
However, a company's quarterly earnings report only provides a limited insight into its performance. And despite Alphabet's impressive showing, investors need to exercise caution with this tech giant given its potential risks.
Possible Challenges Facing Alphabet in 2025
The primary uncertainty surrounding Alphabet today is its antitrust suit. In August, a judge ruled that its search engine operated as a monopoly, and the repercussions for the company are yet to be seen.
One possible consequence could involve the dissolution of the business, although a drastic step like this can't be ruled out completely.
Regulatory bodies may also implement measures that limit Google's search agreements and its dominance in this area. Depending on their decisions, Alphabet could face significant implications for its business and stock.
But even if regulators choose not to dismantle the company or impose limitations on its search business or related agreements, Alphabet might still encounter challenges next year. As other tech giants bolster their AI capabilities and offer more competitive search solutions, Google's market share in US search ads could decrease to less than 50% by 2025, as per estimates from eMarketer.
This would be a significant development because it would mark the first time in over a decade that Google has controlled less than half of the US search ad market. The potential drop in ad revenue and impact on growth expectations from analysts and investors could be considerable.
Is the Stock a Wise Purchase Today?
Alphabet appears to be a reasonably priced investment as it trades at 24 times its trailing earnings, significantly lower than the average stock in the Technology Select Sector SPDR Fund, which trades above 41 times its profits.
However, considering the risks associated with the stock, investors should demand a discount for the uncertainty that lies ahead. Google's search business is a crucial component of Alphabet's operations, and any continued market share loss in the coming year could trigger a significant sell-off.
While the company is currently performing well, investors should always take into account the long-term picture. With greater competition expected in search ads, Google may lose the edge it has enjoyed for years, and the growth factor that has made it such an attractive growth stock.
Given its moderate valuation, the stock might be a worthwhile purchase at its current price, but this is not advisable for risk-averse investors. A more prudent approach would be to adopt a wait-and-see strategy. It's still too premature to gauge the impact of increased competition on Alphabet's revenue and profitability, and the consequences of the antitrust case are yet to unfold.
In light of these challenges, investors needing a secure long-term investment might want to reconsider purchasing Alphabet stocks due to its potential risks in the finance sector. However, for those who are willing to take on a bit more risk and see the company's growth potential, Alphabet's relatively low stock valuation compared to the Technology Select Sector SPDR Fund makes it an intriguing investment opportunity in the realm of money management and investing.
