Alphabet Stock Down 12% in January – Time to Buy GOOG Stock?

The price of Alphabet stock is down 12% so far this month as valuations in the tech sector continue to get pummeled by higher Treasury yields and expectations about major changes in the macroeconomic environment.

A few days ago, the yield of US 10-year Treasury Notes climbed to 1.9% for the first time since the pandemic started as the bond market continues to be under pressure by increasingly higher inflation readings and hawkish comments from officials of the Federal Reserve.

The Federal Reserve Open Market Committee (FOMC) is convening this week to discuss topics including the tapering of the central bank’s $120 billion monthly asset purchase program, a potential schedule for multiple interest rate hikes this year, and the possibility of scaling down the balance sheet.

These discussions mark a U-turn in the central bank’s formerly dovish stand and come at a time when inflation seems to be spinning out of control in the US.

For companies in the tech sector such as Alphabet (GOOG) – typically viewed as riskier due to its rapid product/service cycle – higher Treasury yields mean higher risk premiums and lower valuations.

However, just yesterday, Microsoft (MSFT) reported its financial results covering the third quarter of the 2022 fiscal year and effectively beat the market’s revenue and earnings expectations as demand for its services and products remains strong across the board.

Alphabet will be releasing its financial results covering the fourth quarter of the 2021 fiscal year on 1 February and these positive results from its rival in the cloud industry could be a signal that positive news are coming for the Mountain View-based tech company.

What could be expected from GOOG stock in this current scenario? In this article, I’ll be assessing the price action and fundamentals of this tech stock to outline plausible scenarios for the future.

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GOOG Stock – Technical Analysis

The price of GOOG stock has been declining since November last year in line with what most of the tech and growth sector have been doing as macro conditions and sentiment toward the riskier corners of the market keeps deteriorating.

Only a few days ago the price broke below the 200-day simple moving average for the first time since the 2020 pandemic crash and this is a huge sign of weakness that investors should not ignore.

Meanwhile, two days ago the price bounced off the $2,500 horizontal support during a stock trading session that saw above-average trading volumes. Moving forward, this threshold remains a relevant area of support to keep an eye on.

Momentum indicators remain quite bearish with the Relative Strength Index (RSI) standing at 24 and entering oversold levels while the MACD is neck-deep into negative territory. Negative histogram readings have continued to increase lately as well.

Moving forward, as long as the $2,500 support holds, there could be a short-term technical rebound ahead of the release of Alphabet’s earnings report. However, a break below this mark could result in the continuation of the downtrend with the next target set at $2,250 for a downside risk of more than 10%.

GOOG Stock – Fundamental Analysis

Google’s top-line growth has been decelerating in the past three years at least with the company reporting a 12.8% jump in its revenues in 2020 compared to 18.3% reported in 2019 and 23.4% in 2018.

Meanwhile, gross margins have been declining as well moving from 61% back in 2016 to 54% last year and the same goes for operating margins

A business as large as Alphabet may eventually succumb to the law of large numbers as it gets more and more difficult to find business opportunities that can materially increase the firm’s top-line performance.

However, analysts seem to be expecting a lot from Google as sales are expected to reach the $300 billion mark resulting in a 17% year-on-year jump compared to the market’s forecasts for the full 2021 fiscal year.

However, earnings are expected to increase only 6% in 2022 and that is one of the reasons why the valuation may have been suffering lately as market participants could feel that the stock price in November was overvaluing Google’s prospects.

At yesterday’s closing price of $2,534 per share, GOOG stock is trading at 22 times its forecasted adjusted earnings per share for 2022.

Any indications that the business may fail to live up to these forecasts or the opposite could result in a sizable increase in the firm’s valuation as market participants may regain some of that lost confidence.

Growth aside, at this current valuation Alphabet remains one of the safest and strongest blue-chip stocks in the market as the company has a small long-term debt of $12.8 billion on total assets of $347 billion including $142 billion in cash and equivalents.

Even if Google’s earnings grow at a rate of 5% to 10% in the next 5 years, its strong moat and sound financials make it a top value pick at these levels.

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