You may have noticed tech darling Google has fallen out of favor with investors lately. Alphabet‘s stock price plunged over 30% year-to-date, evaporating over $600 billion in market value.
As a long-term investor, you‘re likely wondering…
- Why has Google‘s high-flying stock crashed so hard?
- What‘s going on with Google‘s key businesses?
- Is now a good time to grab Alphabet on the cheap?
By the end of this straightforward explainer, you‘ll have answers to these critical questions and more. You‘ll be able to make an informed decision on adding GOOGL stock at these beaten-down levels.
Let‘s get to the bottom of Google‘s stock woes!
Overview: Perfect Storm Slams Google Stock
Google enjoyed a gravity-defying surge during much of the 2010s. Its stock gained nearly 650% over the past decade leading into 2022 as online advertising boomed.
But the party finally ended in 2022 as economic storm clouds gathered from every direction:
- Soaring inflation and interest rates tanking tech stocks
- Fears of a looming recession hitting digital ad spending
- Disappointing earnings amid competition from TikTok
- Forced cost-cutting sapping Google‘s lavish employee perks
Caught in this perfect maelstrom, the Google leviathan finally stumbled this year. The stock shed over 30% after hitting an all-time high around $3,000 in early 2022.
Let‘s analyze what went wrong and whether an opportunity is emerging.
Plunging Alongside the Broader Tech Wreck
Like most tech/growth names, Google proved unable to sidestep 2022‘s savage stock market correction.
As you can see below, Google largely moved in lockstep with the tech-dominated NASDAQ Composite index:
| Date | Google Closing Price | % Change (YTD) | Nasdaq Composite |
|---|---|---|---|
| 12/31/2021 | $2,899 | – | $15,644 |
| 2/2/2022 | $3,035 | +4.8% | $14,940 |
| 4/29/2022 | $2,390 | -18% | $12,334 |
| 10/14/2022 | $98 | -32% | $10,321 |
Once inflation hit multi-decade highs above 9%, the Fed deployed aggressive monetary tightening to cool the economy. Investors dumped high-multiple tech stocks amid rate hike fears.
Surging bond yields also diminished the relative appeal of riskier tech shares.
Lacking catalysts, Google‘s stock bled out amid broad tech carnage as recessionary fears mounted. With markets prioritizing safety and income, this wasn‘t an ideal environment for a mega-cap growth stock.
However, this macro factor only explains part of the decline…
Advertising Headwinds Causing Real Damage
While Google rode a decade-long advertising boom to immense heights earlier, the tide is now turning.
As per Insider Intelligence, worldwide digital ad spending is on track to rise just 8% in 2022 – the lowest figure since 2016. Budgets are taking a hit from record-high inflation.
This represents a material slowdown from last year‘s gaudy 35% digital ad market expansion.
For Google specifically, advertising still contributes over 80% of its revenues. So growth is inexorably tied to ad market gyrations.
With marketers now slashing budgets to preserve margins, Google‘s core business is durably weakened. Management expects these spend cuts to continue for at least a few quarters.
YouTube Disaster: Shrinking Ad Revenues
Google‘s crown jewel YouTube – the world‘s largest online video hub – just posted its first ever year-over-year quarterly ad revenue decline:
YouTube Q3 Ad Revenues
2022: $7.07 billion, down 2% YoY
2021: $7.21 billionRival TikTok sprinted ahead as Gen Z‘s favorite short-form video app, while YouTube Shorts remains unproven.
YouTube is also taking a double whammy from drops in both direct-response and brand advertising. Management pointed to pullbacks in sectors like crypto, insurance, and mortgages.
This shocking ad revenue shrinkage shows YouTube‘s growth narrative fraying. It raises challenging questions about YouTube‘s strategy against nimbler competitors.
Alphabet must quickly revamp Shorts‘ monetization and streaming experience to re-accelerate growth.
Surprisingly Weak Q3 Earnings Cratered the Stock
Google‘s stock plunged nearly 10% the day after its Q3 earnings debacle in late October:
Q3 2022 Earnings (YoY Growth)
Revenue: $69.1 billion (+6%)
EPS: $1.06 (-27%)Across the board, Google‘s Q3 results massively underperformed expectations – by around $4 billion in net income!
Both top and bottom line missed forecasts. But more worryingly, operating margins contracted by a chunky 7 percentage points.
This abrupt slowdown in profitability increases doubts about Google‘s near-term growth trajectory. It certainly didn‘t align with the dominant online advertising leader investors thought they knew.
No wonder the stock got whacked after management struck such a judicious tone. Investors are likely waiting on firmer confirmation of earnings stabilization before returning.
Cost Cutting: Bittersweet for Employees
Stung by the sudden growth struggles, Google announced plans to cut back hiring bursts while improving productivity.
After peaking at 24% staff growth in 2022, Alphabet tempered Q3 hiring increases to just 6,900 – its smallest uptick since 2020.
While essential to defend margins, this slowdown stings richly-compensated employees who rely on frequent refresher grants. Google also faces heightened talent competition from cash-rich startups.
On the flip side, Alphabet is sharpening its focus by culling peripheral projects in gaming and robotics. Rising R&D efficiency can unlock savings to plow into Cloud, AI, and Search – the crown jewels.
Though financially prudent, the glamour days of lavish Google perks and experimental moonshots appear over.
Valuation Discount Partially Reflects Risks
Thanks to the 30%+ haircut this year, Google‘s valuation has become more reasonable relative to its 5-year history.
As you can see below, today‘s forward P/E ratio of 17.3X no longer demands perfection.
| Date | Google Stock Price | Forward P/E Ratio |
|---|---|---|
| 12/31/2021 | $2,899 | 29.5X |
| 10/28/2022 | $96 | 17.3X |
But don‘t expect a v-shaped recovery either. Concerns around advertising demand and rising competition will likely cap multiples near-term.
Upside potential hinges on reassuring signs of stabilization in YouTube and ad spend recovery.
Most Wall Street analysts remain bullish on Alphabet‘s ability to weather this patch, even if growth normalizes at a permanently slower pace.
I concur – Google‘s entrenched dominance in online search and digital video can power through temporary headwinds. Its burgeoning Cloud segment also boosts its margin profile.
The Key Takeaway: Storm Survivor
In summary, Google‘s historically robust stock crashed under the toxic combination of:
- Surging inflation/rates tanking tech valuations
- Advertising slowdown hurting its core business
- YouTube shrinking amid TikTok‘s rise
- Weaker-than-expected earnings reports
With fears swirling over a potential recession, this wasn‘t an ideal backdrop for an advertising leader trading at bubble valuations.
However, for long-term buyers, I believe the current reset likely carries more opportunity than risk.
You now get to invest in an entrenched tech winner at reasonable valuations – a rare chance to grab this dominant force at a 30%+ discount.
As global digital ad spending rebounds amid post-pandemic normalization, Google‘s earnings engine should resume humming. Its battlefield-tested management team knows how to align priorities during instability.
So what‘s your verdict? Does today‘s acceptable valuation override near-term macro uncertainty in your eyes?
Let me know your thoughts in the comments section below!
