Why Alphabet (GOOG) is a Buying Opportunity Ahead of Q3 Earnings
As we roll into the Q3 earnings season, it’s essential to identify opportunities that are ready to rebound, and Alphabet Inc. (GOOG) is shaping up to be one of those stocks. The tech sector that propelled U.S. stock markets higher in the first half of the year has encountered headwinds in the latter half, leading to a mixed bag of performance, particularly among Big Tech stocks.
Tech Struggles in a Strong Market
While the S&P 500 and Dow Jones Industrial Average have charged ahead to record highs, many major tech players are languishing below their 2024 peaks. Alphabet, despite boasting a year-to-date gain of 19.6%, has found its stock hovering in correction territory, down about 13% from its earlier highs.
What’s Going Wrong with Alphabet?
Alphabet has been facing a multitude of challenges on both business and regulatory fronts. Its Q2 earnings report fell short of expectations, even though the results showed a beat on the top and bottom lines, largely due to YouTube’s disappointing revenue performance. On the long-term horizon, Alphabet is contending with fierce competition, particularly from OpenAI, whose valuation skyrocketed to $157 billion. Investors are increasingly concerned about Google losing its grip on the search market.
Regulatory pressures are also mounting, as Alphabet lost an antitrust ruling related to its exclusive search arrangements with Android and Apple devices. Reports suggest the Justice Department is considering breaking up Alphabet, further dampening investor sentiment.
Moreover, despite its strides in artificial intelligence, Alphabet has not yet shaken off the impression that it is lagging behind Microsoft-backed OpenAI. As a result, three brokerages—Rosenblatt, Bernstein, and Loop Capital—have downgraded GOOG from “buy” to “neutral” this year, exacerbating the stock’s woes.
Wall Street Sees Potential
However, all is not lost for GOOG. Some analysts are slowly starting to warm up to the stock. Citigroup has recently listed Alphabet along with Uber and Amazon as top picks ahead of Q3 earnings. Pivotal Research began coverage on Alphabet with a “buy” rating and a $215 price target. Currently, the consensus rating for Alphabet stands strong at “Strong Buy” from 46 analysts, including 35 “Strong Buy” ratings.
GOOG’s average target price sits at $202.93, marking a 20.4% upside from its recent closing price. The most optimistic forecast among analysts predicts a jump to $225, which indicates an astounding 33.5% upside potential.
Reasons to Buy Ahead of Q3 Earnings
Despite the uncertain landscape, the negatives concerning Alphabet appear to be largely priced in. The stock trades at a forward price-to-earnings ratio of 20.6x, the lowest among its peers in the so-called “Magnificent 7.” While Meta Platforms enjoyed a revaluation after posting strong growth, Alphabet still has significant room for upward movement as sentiment revolves around AI development.
The ongoing AI race is just beginning, and while Alphabet may not be leading at the moment, the competition remains wide open. As veteran AI researcher Oren Etzioni succinctly said, “It’s a marathon, and it’s anybody’s race to win.” He added that Google has the technical capabilities that remain top-notch yet has been conservative in rolling out its innovations.
Additionally, Alphabet boasts other growth arms that can yield substantial returns. For instance, its Waymo self-driving unit has partnered with Uber for driverless ride-hailing in major cities, and its Cloud segment saw revenues of $10 billion in Q2, marking its first $1 billion operating profit.
Final Thoughts
In this inflated market, buying shares of Alphabet offers a compelling opportunity for those willing to ride out short-term uncertainties. As we approach the Q3 earnings confessional, don’t let fear dictate your investment decisions. Sometimes, when the market is fearful, it pays to be greedy. Keep an eye on GOOG—it could be poised for a rebound, rewarding those who seize this opportunity at a strategic entry point.