Alphabet Stock Faces Challenges Amid Tech Market Correction

The stock market sees a downturn, notably affecting Alphabet (GOOGL), which is down 20% from its high. Despite strong revenue growth and EPS, concerns about advertising spending and AI costs loom.

Date: 11-03-2025

AI Rating: 7

Market Overview
The Nasdaq-100 index is experiencing a correction, showing a drop of more than 12% from recent highs, primarily impacted by the decline of significant technology stocks, including the "Magnificent Seven." Alphabet, the parent company of Google, has also faced a substantial decrease, currently down by about 20% from its peak.

Alphabet's Financial Metrics
Alphabet's latest results denote notable financial performance, highlighted by a 12% growth in revenue year-over-year. Their earnings per share (EPS) impressively grew by 31%, indicating strong profitability. The Google Services segment, which encompasses various consumer-facing services, achieved double-digit revenue growth, which is a positive sign for the business's overall health.

The standout performer within Alphabet is its Google Cloud segment, which registered a remarkable 30% year-over-year revenue growth in the most recent quarter. This segment's growth is crucial as the global cloud services market is projected to expand significantly in the coming years, providing Alphabet with ample room for growth.

Furthermore, Alphabet generated just over $100 billion in operating income in 2024 and boasts approximately $73 billion in net cash on its balance sheet. The consistency in cash flow has allowed Alphabet to initiate dividend payments, which, although currently small, could increase down the line.

Risks and Concerns
Despite the strong performance metrics, there are considerable concerns surrounding Alphabet's business model. The reliance on advertising revenue makes Alphabet vulnerable, particularly in a potential recession where advertising budgets are typically reduced. Moreover, there are apprehensions related to the Justice Department's scrutiny of Google's operations and the substantial investments in AI technology—amounting to $75 billion this year—which raises questions about the return on this expenditure for the company.

Valuation Perspective
Currently, Alphabet's stock is trading at around 20 times its trailing twelve-month earnings, marking the lowest valuation since early 2023, despite solid business performance. The adjusted valuation, accounting for the substantial cash reserves, presents a favorable outlook for long-term investors.

In summary, while Alphabet encounters challenges that may create stock volatility, the underlying business fundamentals and favorable valuation suggest that it could be an attractive investment opportunity for those willing to navigate potential near-term uncertainties.

Stocks: GOOGL