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Could Alphabet stock be my smartest buy this year?

Google office headquarters
Image source: Getty Images

I have a shortlist of shares I would like to buy for my portfolio if their price reaches an attractive enough point. A longstanding name on that list is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). As the owner of digital properties including Google and YouTube, I see the company as a financial powerhouse. Its share price has been falling and is approaching a point where I would consider adding it to my portfolio. I reckon buying Alphabet stock at the right price might ultimately turn out to be my smartest investment decision this year. Here is why.

Making money in the stock market

Ultimately the stock market is exactly what it sounds like. It is a market, where sellers and buyers make a deal to transfer shares between one another at an agreed price.

As a long-term investor, then, to make money owning shares I try to find great businesses selling below what I think is their fair price. After holding for a number of years, I may be able to sell them at a higher price if the business has performed as well as I expect.

That is what attracts me to Alphabet. It owns a unique set of businesses that rivals would struggle to copy outright. It has a massive customer base. On top of that, it is hugely profitable. Unlike some digital rivals, Alphabet is a large-scale global business with a proven business model and enormous profit generation capabilities.

Falling share price

Despite that, Alphabet stock has tumbled 32% over the past year.

That fall reflects some of the risks the company faces. There is growing competition from digital upstarts like TikTok. That could hurt revenues and profitability at Alphabet. As a company with a huge advertising business, the Google parent could also see profits fall sharply as advertisers tighten their belt in the recession. In the last quarter, net income fell 26% compared to the same period in the prior year. Revenue growth of 6% year on year was sluggish by Alphabet’s standards.

If income keeps falling – with a risk too that revenue growth may also go into reverse as advertising expenditure falls – I think the Alphabet price may slide further.

Quality on sale

At what price would I consider buying Alphabet shares for my portfolio?

Actually, I already think the price is quite attractive, with a price-to-earnings ratio in the high teens. But earnings may fall, meaning the prospective ratio is less attractive.

However, from a long-term perspective, Alphabet has what I see as a compelling investment case. It enjoys the sort of business moat billionaire Warren Buffett talks about, meaning it enjoys a strong competitive advantage in its market.

A decade from now, I would not be surprised if the stock is worth far more than today. Over the past decade, it has grown by over 500%. That is not a guide to future performance. But I do think adding it to my portfolio at current prices might turn out to be a very lucrative move over the years. Given the firm’s compelling business model, buying its shares might even be my most rewarding move this year. If I had spare cash to invest, I would do that.

The post Could Alphabet stock be my smartest buy this year? 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