Alphabet (GOOGL 0.57%) (GOOG 0.20%) is without a doubt one of the most widely followed companies on the planet -- and for good reason. Most of the people reading this are probably users of its products. Moreover, its shares have made for a great long-term investment, rising 438% in the past decade, which crushes the corresponding performance of the Nasdaq Composite index.
For such a well-known business, it's a smart idea to take the time to understand more, especially from an investing perspective.
With that being said, here are the bear and bull arguments for this FAANG stock. Armed with more knowledge, perhaps you'll be ready to make a better portfolio decision about Alphabet's shares.
Don't ignore the downside risks raised by the bears
Artificial intelligence (AI) has gotten a lot of attention in the past several months. The popularity of ChatGPT and other large-language chatbots raised alarms that Alphabet's bread-and-butter segment, Google Search, is about to be disrupted.
The argument is that if internet users can get a single conversational answer to their question, there would be no need to show a bunch of links, which also means no need to place digital ads. Because 79% of Alphabet's revenue in 2022 came from advertising, some investors see the risk that AI poses.
It's become more obvious recently just how cyclical the market for digital ads really is. When the Federal Reserve aggressively started hiking interest rates in 2022, many people were sure that a recession was imminent.
And when there are worries that difficult times are ahead, marketing executives can quickly cut back on their spending. And this hurts a business like Alphabet. Its revenue was up just 9.8% last year, a slowdown (when compared to prior years) that has continued into this year.
A persistent risk factor with this company has got to be regulatory headaches. Alphabet paid regulatory fines in the past for various reasons, primarily in the U.S. and in the European Union. Currently, it's in an antitrust fight with both governmental entities over the market power the company's search engine has, with U.S. and E.U. regulators arguing that Google illegally used its industry position to limit competition.
It's hard to know how these ongoing battles will play out. But investors need to understand that this is just business as usual for Alphabet.
NASDAQ: GOOGL
Key Data Points
The bulls are louder
While the bear cases are certainly worth paying attention to, investors can also appreciate the reasons to like this dominant company.
For starters, despite all the talk about Google Search's demise due to the rise of AI, it still has a monopoly position over the search market at 92% share, according to statcounter.com. Google has such a massive data advantage, as well as huge network effects, compared to any other search engine out there. So it's clearly the superior product on the market, a position that isn't changing anytime soon.
Digging more specifically into AI and its potential, it's hard to envision a scenario where Alphabet isn't a leader when it comes to the new technology. CEO Sundar Pichai positioned the company to be "AI first" several years ago. And AI already permeates through various Alphabet internet services, with exciting new features on the way.
By having billions of users, Alphabet already has an engaged audience so it can launch new AI products. And then it can quickly gather feedback, which can be used to constantly improve the offerings. A younger AI start-up just doesn't have this luxury.
Plus, with more than $100 billion in cash, cash equivalents, and marketable securities on the balance sheet, Alphabet has the financial resources to keep investing in AI initiatives. Consequently, it's in a prime position to spearhead this tech.
While macro headwinds can be a negative factor in the near term, if we zoom out, we'll easily see that Alphabet benefits from some major secular trends that should drive growth for a very long time. Not only does the business have the ongoing growth of digital ads as a tailwind, but the potential for cloud computing and streaming entertainment to become larger markets will directly propel Alphabet, particularly as it relates to Google Cloud and YouTube, respectively.
In short, I think the bullish cases outweigh the bearish arguments, making Alphabet a top stock to buy right now.
