Google sales

Will Slowing Google Ad Sales Drive Alphabet Stock Down?

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In the first nine months of 2022, tech stocks have seen a massive sell-off. Steep valuations for growth stocks, coupled with macroeconomic challenges, have lowered multiples significantly.

For example, digital advertising companies, including Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) are struggling with declining business ad sales. This has caused GOOGL shares to drop nearly 35% over the past year.

So let’s see if the current environment will drive the tech heavyweight’s share price lower in the near term.

Google is the largest digital advertising company in the world

Over the past decade, digital ad spend has grown and has been a key driver of Alphabet’s revenue growth. In fact, digital ad spend accounted for nearly 65% ​​of total ad spend last year. By comparison, Alphabet’s ad sales jumped to US$209.5 billion in 2021 from a paltry US$410 million in 2002.

In fact, Alphabet’s ad sales jumped 43% year-over-year in 2021. But due to rising interest rates and inflation, Alphabet’s ad sales Google in the first six months of 2022 grew only 17% year over year to US$111 billion. Additionally, second-quarter (Q2) ad sales slowed to 12% in the quarter that ended in June.

As the cost of debt rises and the economy slows, corporate advertising spending will continue to decline next year.

Alphabet stock is a top notch bet right now

Google enjoys a wide economic moat and is the undisputed leader in the digital advertising space. It is the most popular search engine in the world, generating 92% of search engine traffic. Google Search is Alphabet’s flagship product and a key driver of revenue growth.

Yes, Alphabet is facing challenges from new entrants such as TikTok. But active users of YouTube are almost three times higher than TikTok.

Alphabet continues to diversify its revenue base. While ad sales still make up the majority of the company’s revenue, its public cloud business grew sales 36% year-over-year in the second quarter of 2022. Google Cloud is now the third largest and fastest growing cloud infrastructure company in the world. business for Alphabet.

Currently, Google Cloud only accounts for 8% of the public cloud market, which presents an opportunity for it to gain market share in the future.

Alphabet is also betting on game-changing technologies. Its self-driving car technology, also known as Waymo, could unlock another multibillion-dollar revenue stream for the company by the end of this decade.

Alphabet has a very engaged user base, which should allow it to further monetize them if needed. It offers nine products with over a billion users, including YouTube, Google Maps, Play Store, Gmail, and Chrome.

It has created a robust ecosystem, so users are unlikely to switch to competitors without a compelling reason.

The insane takeaway

Alphabet stock is valued at 4.4 times forward sales and 19 times forward earnings, which is very reasonable given its estimated growth rates. Analysts expect the company to increase its sales from US$258 billion in 2021 to US$323.4 billion in 2023. Additionally, its profits are expected to increase by more than 10% annually between 2022 and 2025. .

Alphabet shares are also trading at a 50% discount to average price target estimates.