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Is the bear case for Alphabet stock persuasive?

Google office headquarters
Image source: Getty Images

When investing, I always try to look at both sides of the argument for or against owning certain share. I have been considering buying a stake in Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock for my portfolio because of what I see as the firm’s long-term prospects. But over the past year, Alphabet stock has tumbled 23%.

Clearly, many investors feel less bullish about the tech giant than I do. Here are some reasons why.

Worsening economic environment

As the owner of popular websites like Google and YouTube, Alphabet makes a lot of money by selling advertising space.

But advertising is a discretionary expenditure for many companies. That means in the current recession, they may cut back on ad spend.

Advertising demand

Is that a big risk to sales and profits at Alphabet? I think so. In its most recent quarter, the firm saw annual revenue growth of 6%. While that is positive, it is far below the 41% recorded in the equivalent quarter a year earlier. Operating income fell 19%, while net income was down 27%.

As a long-term investor, I do not just consider a single quarter’s performance. But the recent profit figures were not pretty. The advertising market could see falling demand, eating further into profitability. I think that makes owning Alphabet stock less attractive.

Buffett-style moat

A key element of the bull case that attracts me to investing in the company is the strength of its competitive advantage, or what investor Warren Buffett calls a ‘moat‘.

Alphabet has a mammoth user base and offers a wide range of services. Learning more about each user helps the business target its advertising. Users time and effort getting to grips with the firm’s services, making them less likely to switch to competitors.

Rising competition

That model could suffer from growing competition though. For example, TikTok is increasingly being used as a search tool, which could make Google’s key service obsolescent for some digital users. YouTube could also suffer from the growing popularity of videos on rival platforms.

If Alphabet sees its user base decline in coming years, that threatens both revenue and profits. That helps explain the falling stock price – and why it could keep heading south.

I’d buy the stock

I think the bear case above involves some persuasive points. After all, the company has a market capitalisation of $1.3tn. To justify that, it needs to show massive commercial potential over the long term.

On balance though, I still find the investment case compelling.

I see the advertising downturn as temporary not permanent. In fact, over the long term, I expect digital ad spend to grow. While competition is a real threat, Alphabet has been a powerful innovator for its whole existence. I think it can manage the growth of rivals while still making big profits.

If I had spare cash to invest today, I would take advantage of the past year’s decline in the Alphabet stock price to add it to my portfolio.

The post Is the bear case for Alphabet stock persuasive? appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet. 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 2023