After rising about 65% in 2021, Alphabet (NASDAQ:GOOG) has had a torrid start to 2022. Shares of GOOG stock are down 12% since the start of the year. On Jan. 21, the stock closed at around $2,600 per share. The market capitalization, once nearly at $2 trillion, is currently down to $1.7 trillion. Finally, the price-earnings (P/E) ratio is currently 24.
A few months ago, that would have been an unbelievable bargain. With interest rates rising and stocks continuing to fall, is it still? Shares are now trading around the $2,500 mark.
Here’s what you should know about GOOG stock moving forward.
GOOG Stock: The Strengths of Google
Alphabet is next due to release fourth-quarter earnings on Feb. 1. Overall, the company has become a profit monster.
In Q3, for example, the company had net income of nearly $19 billion, or $27.99 per share. That was on revenue of $65.1 billion. Expectations for Q4 look slightly more modest, with profits of $26.69 per share and revenue of nearly $72 billion.
Advertising represented 81% of Alphabet’s revenue during Q3, with 71% of that coming from the Google search engine itself. But revenue from Google’s ad network as well as YouTube also rose around 40% during the quarter. Roughly 29% of Google’s revenue hit the net income line. That’s an extraordinary figure.
Alphabet still pays no dividend and its cash hoard jumped to over $142 billion at the end of September. Further, there was just $14.3 billion in long-term debt. On Tipranks, GOOG stock has 28 analysts covering it and all but two say it is a buy. The shares have an average price target of $3,386, around 34% ahead of where it is now.
Finally, Google did extremely well during the pandemic. It was the big tech stock of the year and didn’t have to make any moves to achieve that. It handed out stock awards worth tens of millions of dollars to top executives at the end of the year. And no one batted an eye.
The Weaknesses
All those strengths aside, there are some things to be aware of with GOOG stock. For example, Alphabet’s strength in advertising is letting it subsidize its Cloud, which continues to lose money.
Cloud revenues grew 45% during Q3, slightly faster than the rest of the company, but the segment also lost $644 million. It has been buying stakes in customers just to get the business. When the customer is the CME Group (NASDAQ:CME), whose stock is up 19% in the last year, that’s good business that can also bring CME market participants into the fold. When it’s ADT (NYSE:ADT), though — down 25% in the last year — investors might question it. If markets can’t recover their footing by March, expect to see some heavy losses.
Despite its spending, Google Cloud still has just 7% of global cloud infrastructure spend. That’s against 32% for Amazon (NASDAQ:AMZN), whose AWS cloud is consistently profitable. Google also continues to burn money on its “other bets” — companies like Nest, Verily, Waymo and Calico. These names brought in just $182 million during Q3 and lost a collective $1.29 billion. If Alphabet were smaller, people would notice. Instead, it’s lost in the shuffle.
The Bottom Line on GOOG Stock
Google’s dominance of advertising covers up a multitude of what would be sins at other companies. That said, the only real threat to its dominance is government. The U.S. Justice Department and several states have an ongoing antitrust suit against it and Congress is considering legislation.
This company keeps collecting antitrust fines in Europe as well, the most recent one being $2.7 billion. European Commissioner of Competition Margrethe Vestager is planning further suits and is pushing a Digital Services Act. The act would fine Google further if it fails to act more strongly against “illegal content.”
No one expects GOOG stock to do as well in 2022 as it did last year. But, with the caveat that government action could take this name down a notch, the market’s fall has certainly given investors an attractive entry point.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.