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Alphabet shares are down 40%. Should I buy the dip?

Young female business analyst looking at a graph chart while working from home
Young female business analyst looking at a graph chart while working from home

Shares in Alphabet (NASDAQ:GOOG) have fallen by 40% over the past 12 months. That means if I’d invested £1,000 in Alphabet shares a year ago, I’d be able to sell my investment for around £600.

But with Google’s parent company reporting higher revenues than ever, is the Alphabet share price a bargain? Or is it indicative of difficult times ahead for the business?

I think that Alphabet is a strong business with solid cash flows and a sound balance sheet. As I see it, the company is facing a temporary headwind, making this a great time for me to buy shares.

Slower growth

Alphabet shares have been falling lately as the underlying business has been facing some challenges. The company recently  announced slow revenue growth and lower earnings per share than expected.

This was the result of two things. The slowing revenue growth is the result of lower advertising budgets among its customers, and the lower earnings were the result of inflation pushing up Alphabet’s costs.

I think it’s significant that both of these are macroeconomic factors. In other words, neither is about Alphabet specifically, though both impact the business directly.

That gives me reason to think there isn’t a problem with the underlying business. I expect inflation to moderate eventually and when it does, I expect Alphabet’s margins to recover.

Stock-based compensation

The biggest risk with the company I can see is one that nobody seems to be talking about. It’s the amount of stock-based compensation the company pays out.

According to its financial statements, Alphabet has paid out $18.2bn in stock over the last 12 months. That’s a significant expense and it’s been growing at an average of 18% annually since 2018.

Stock-based compensation doesn’t show up in a company’s cash flow statement. This is because it involves making payments in stock, rather than in cash.

But Alphabet has been using its free cash to buy back shares. As a result, the shares it sends out to its employees weigh on the company’s free cash flow.

Alphabet’s stock-based compensation accounts for around 6.5% of its revenues. That’s lower than Meta Platforms (9.6%), but higher than Amazon (3.5%), Apple (2.3%), or Netflix (1.6%).

Should I buy the dip?

It’s an issue I plan to keep a close eye on. Nonetheless, if I had money to invest right now, I’d buy the stock at today’s prices.

I think that the headwinds the business is facing at the moment are temporary. I expect inflation to subside eventually and Alphabet to improve its earnings when this happens.

When the shares were at $146, I’d have been delighted to buy them at $87. Now that the share price has reached that level with no significant change in the business, I’m getting ready to jump in when I can.

The post Alphabet shares are down 40%. Should I buy the dip? appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Alphabet (C shares), Amazon, Apple, and Meta Platforms, Inc. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022