A growing number of stock market commentators are arguing that a big recovery for Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) will happen in the coming year. Yet while at first glance GOOG stock may seemingly have many of the ingredients in place to make such a comeback, it’s far from a given.
Sure, despite all the doom and gloom out there right regarding high inflation, rising interest rates, and slowing economic growth, a 2023 recovery for the stock market may happen sooner than currently expected. The market is forward-looking. Stocks will likely begin to recover ahead of a recovery for the overall economy.
However, that may not necessarily mean GOOG is set to recover. Further downside for the tech giant’s shares may be minimal, but potential upside may be minimal as well. Shares could trade sideways over the next twelve months, or at best make only a modest move higher.
| GOOG | Alphabet | $89.63 |
Is GOOG Stock ‘Deep Value?’ Not Exactly
After its 38.5% price decline since the start of 2022, Alphabet stock has moved to what appears to many to be a low valuation (around 17.6 times earnings). However, I wouldn’t say shares have entered “deep value territory.”
The two factors that enabled GOOG stock to command a far higher price-to-earnings (or P/E) ratio (high 20s/lows 30s) are not likely to return anytime soon. Those factors are near-zero interest rates and extremely robust demand for the company’s products/services.
As I’ve stated previously, while the Federal Reserve may eventually lower rates again, it’s unlikely the central bank will bring them back down to near-zero levels. With this, a re-rating for the stock will only likely occur if the company’s earnings growth re-accelerates again. However, this also does not appear likely.
The current slowdown in demand for digital advertising and tech-related services could continue through most of 2023. Even if things begin to recover in the latter half of next year, that doesn’t mean that a big growth bonanza awaits. There are certain factors that may limit how much Alphabet’s earnings pick up in the upcoming quarters.
Underwhelming Growth, Underwhelming Returns
Current earnings forecasts for GOOG stock call for a moderate rebound in the FAANG component’s earnings over the next year. Per analyst consensus, Alphabet’s earnings per share (or EPS) is expected to climb back to $5.27 in 2023.
That represents a big increase from the current 2022 EPS estimate ($4.73), but this is slightly below the strong EPS reported in 2021 ($5.61). However, the sell-side community has dialed back its 2023 forecast substantially over the past three months. Previous estimates called for Alphabet to report EPS of $6 next year.
A lot remains up in the air, as it’s unclear when exactly a rebound for the tech sector will begin to take shape. Not only that, there’s another factor, one more specific to the company, that may negatively affect future results: competition.
Alphabet’s Search business, despite all the hype surrounding ChatGPT, may be safe from competitive risks for now, but the company’s Google Cloud and YouTube segments continue to be negatively affected by this factor. Google Cloud remains far behind its larger competitors, and far from reaching profitability. TikTok, which has already grabbed market share from YouTube, continues to become a greater competitive threat.
The Verdict
Although GOOG may look like “deep value” on a stock screener, “value trap” may be a more accurate descriptor for the stock at present. Given the current macro conditions, it’s unlikely that major multiple expansion is just around the corner.
If the aforementioned factors impact results in the coming quarters, there’s a good chance shares continue to trade sideways for most of 2023.
Even if the company manages to meet/beat expectations, this may not result in a massive boost higher. Rather than surging 20%, 30%, or even more, best case scenario, shares may only make a return to prices barely at triple-digit levels.
There are plenty of high-quality large-cap stocks out there in today’s market, with substantial rebound potential. Hold off on GOOG stock, and focus on these stronger opportunities instead when deciding on new positions for the upcoming year.
GOOG stock earns a D rating in Portfolio Grader.
On the date of publication, Louis Navellier held GOOG. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.