Alphabet (GOOGL or GOOG), Google’s parent company, is now the largest advertising platform in the world. That would be good news in a healthy market, but heading into a recession, it is actually bad news. Advertising is highly cyclical, and when consumers start pulling back and the economy slows, marketing is often one of the first parts of a company’s budget to be cut.

Alphabet’s last results, reported in late July, showed plenty of evidence of that…

Alphabet’s Slowdown

The company’s quarterly revenue growth fell to its slowest pace in two years, despite its search and cloud businesses doing relatively well. The Google parent reported a 13% rise in revenues during the June quarter to $69.7 billion, missing estimates of $70.8 billion and marking the fourth consecutive quarterly slowdown compared with the previous year.

The 13% revenue growth has put Alphabet on a clear downward trajectory. Growth was 23% in the March quarter, 32% in the December quarter, and 41% in the September quarter.

At the same time, fast-rising interest rates are squeezing Alphabet’s valuation (along with most other U.S. tech stocks’ valuations) as investors reappraise the attractiveness of long-term growth companies.

It’s not a surprise, then, that Alphabet’s share price has fallen by more than a third this year to date. It now trades at about 16 times 2023 consensus earnings, well below its peak of 23.6 times in August of last year.

The question arises as to whether Alphabet’s stock has fallen enough to be bought now.

Alphabet: Dominant in Ads and Growing in Cloud

There is no doubt rising inflation and interest rates has changed the economic outlook – a definite slowdown is coming.

However, many of the factors that make Alphabet a great business haven’t changed. Google still has more than 90% of the global search engine market, with more than 4 billion users worldwide. These users enabled the company to generate $56.2 billion of advertising revenue in the second quarter of 2022, for an average advertising revenue per user (ARPU) of around $14 for the quarter.

For comparison, Meta Platforms (META), the second-largest advertising business in the world, had a quarterly ARPU of $9, while Twitter (TWTR) and Snap (SNAP) had ARPUs of $5 and $3, respectively.

In addition to search, Alphabet also has a fast-growing cloud business. In the second quarter of this year, revenue from its cloud business was up 36% from the year-ago period, to $6.2 billion. From being insignificant, the cloud now makes up 10% of the company’s total sales. Although losses did widen from $591 million to $858 million due to increased investment in servers.

Of course, Amazon Web Services is still the biggest player in the industry, with Microsoft Azure second. With AWS growing “only” 33% from the year before, both Azure and Google Cloud’s faster growth rate in the second quarter means they are taking some market share from AWS. I believe Alphabet is likely to take further market share thanks to the synergies between its core and cloud divisions.

Alphabet can sell its “Workspace” product—a suite of programs including Gmail that allow collaborative work throughout an organization—along with its cloud service. This is similar to Microsoft, whose Office 365 suite is often sold alongside a subscription to its Azure cloud product.

Alphabet’s Side Hustles

The toughest part of Alphabet to understand is its venture arm, known as its “Other Bets” division.

The most well-known of these businesses include the self-driving car business, Waymo, as well as healthcare company Calico, which is in the early stages of testing a drug on patients with ALS, and a drone business, Wing, which has passed 250,000 commercial deliveries.

This division, in the second quarter, generated losses of $1.69 billion on revenue of just $193 million. But revenues are starting to grow – revenues are up from just $1 million in 2021.

Keep in mind that in the same way that venture capital firms operate, Alphabet only needs just one world-changing technology winner that could generate significant future cash flow to the business. And with the $22.8 billion of operating profit its advertising business generated in the second quarter, it is uniquely poised to fund such blue-sky, long-term ventures internally.

Add all of this up and Alphabet is a buy. But, with the ongoing rise in interest rates and a bear market in tech stocks, do not jump in all at once. Average into Alphabet, perhaps on a monthly basis. Any purchase around $100 a share is a reasonable price.