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Down 20% this year, Alphabet stock is cheap in the long run


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The tech sector is under fire and no company is immune. Same Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) – one of the largest and most profitable technology companies in the world – has not been spared. Shares of GOOGL have fallen 20% year-to-date, with shares falling from a high of over $3,000 to an opening price below $2,300 today.

The decline came despite fairly strong earnings. Unlike many of its peers, Alphabet didn’t hit investors with a particularly bad earnings report. Either way, stocks broke through technical support at $2,500 and struggled to stem the drop.

Alphabet’s decline is due to the broader market rather than its own earnings or outlook. Yes, it is true that Alphabet missed its revenue slightly and its profit moderately in the first quarter. For people who just read the headlines, Alphabet fell short of expectations.

It is important to break things down by category. Google’s search, digital services and cloud all grew online or ahead of expectations. The cloud in particular is doing well for Google, despite some fears of a slowdown this quarter.

The big problem was a dramatic slowdown in YouTube’s revenue growth. This played into broader concerns that the digital advertising market is losing steam. Historically, advertising has been a cyclical market driven by the broader economy, and analysts fear Google may experience a downturn as the economy cools after a boom in 2021. Beyond advertising, however, Alphabet works well operationally.

Even in advertising, another factor below the surface is that YouTube is pushing its shorts feature heavily. These are short videos directly designed to compete ICT Tac. Right now, these are very lightly monetized as opposed to full YouTube videos. However, engagement with these shorts has increased significantly and should generate revenue over time as YouTube figures out how to handle ad load for this product.

Basic metrics such as advertising prices and profit margins from advertising business have increased, indicating that Alphabet’s operations are doing better than many of their digital rivals.

The big problem with Alphabet shares now is simply that no one wants to invest in technology yet. In fact, former winners, such as FAANG shares, are now being sold off as people raise capital. Large funds, in particular, need cash to meet redemptions or shore up positions in smaller, less liquid companies. Assets such as GOOGL shares are used as much-needed sources of cash.

During a market sell-off, people sell what they can where there is still liquidity and relative value, instead of selling their most battered holdings. Given this market dynamic, GOOGL stock could remain under pressure for much of 2022.

That said, for investors with a longer time horizon, say the next 3-5 years, there is a good chance that buying Alphabet today will lead to a profitable outcome.

As of the date of publication, Ian Bezek had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Ian Bezek has written over 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a $300 million New York-based hedge fund. You can reach him on Twitter at @irbezek.

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