There are times when Alphabet (NASDAQ:GOOGLNASDAQ:GOOG) stock acts as a trailing trade to safety.
Its strong finances attract investors when they feel nervous or worried. However, GOOG stock can only resist if the proverbial crap hits the fan.
Take the Covid-19 liquidation, for example. The Nasdaq sold around 33%, while Alphabet fell 34%. In the most recent selloff, Alphabet fell 32.7% against the Nasdaq’s 31.9% drop. In both cases, Alphabet roughly trailed the index lower, it couldn’t top it. On the positive side, GOOG stock rebounded 200% from Covid lows compared to Nasdaq’s 150% rally.
Where are we going with this?
During slight setbacks, Alphabet can be a must. However, during really turbulent times, its endurance is compromised. That said, look at many of the high-flying growth stocks that are now down 70% to 80% or more.
Watch more than half of FAANG or even high quality stocks like Advanced micro-systems (NASDAQ:AMD) and Selling power (NYSE:RCMP), which lost about 50% of their value.
When we look at Alphabet’s stock, the stock holds up to some degree because it’s a great platform and a great company. The stock has only fallen 30% or more three times in the past 13 years – and two of them since 2020.
We are in the middle of such an opportunity right now, but the other two instances turned out to be incredible opportunities for the bulls. This one too?
3 reasons to buy Alphabet shares
Alphabet didn’t amass a market capitalization north of $1 trillion by accident. He painstakingly built one of the strongest companies in the world. It has the two best websites in the world with Google.com and YouTube.com.
Thanks to these two assets, his advertising business has flourished, allowing him to devote resources to other businesses as well. Most notably, it’s the company’s cloud business, which competes with other heavyweights like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
Analysts expect double-digit revenue growth in each of the next three years. Specifically, they expect 15% growth in 2022 and 2023. As for earnings, estimates call for flat growth this year, but that is followed by estimates of nearly 20% growth in 2023. .
Investors will surely lament this year’s earnings growth forecast, but at some point the other attributes will have to compensate for this reality.
First, Alphabet shares are trading at just under 20 times this year’s earnings estimate (and last year’s earnings). Second, free cash flow remains robust, with the company raising around $60 billion last year alone. Third, the balance sheet is strong, with $134 billion in cash and short-term investments.
Due to its strong financial position, the company recently launched a $70 billion buyout plan.
Is the evaluation a pro or a con?
When we look at consumer staples stocks, we see high price-earnings valuations. I’m talking about names like Clorox (NYSE:CLX), Procter & Gamble (NYSE:PG) and others with little growth. Then I see GOOG stocks trading at less than 20x earnings, despite having a much stronger financial position and solid growth.
Allow me to offer an explanation.
First, tech stocks are the ones being crushed, so Alphabet and its peers will come under additional pressure. However, the best explanation is that high-quality consumer staples companies tend to have more resilient earnings.
What they lack in growth, they make up for in stable profits. This stability – i.e. predictability – is worth a premium for investors in times of uncertainty. If we do fall into a recession, Alphabet’s results will come under additional pressure, while companies like P&G and Clorox will likely weather the storm better.
I’m not advocating throwing GOOG stocks here and piling them into consumer staples. I’m just offering a realistic explanation of Alphabet’s valuation and what that means relative to other opportunities.
Personally, I don’t mind picking up GOOG stocks at less than 20 times earnings. This is especially true given its long-term growth prospects and the simple reality that its assets and financial condition are almost impossible to ignore.
What the charts say for GOOG Stock
Once the stock fell below $2,500, it quickly fell into the $2,000 area. The latter is a clear support layer, but don’t settle for that. This area is, at the very least, vulnerable to another test if the selling pressure continues.
If that fails, GOOG stock could experience a decline towards the $1,750 area. For regular investors, I like the average dollar cost (DCA) approach of quality names like Alphabet. In other words, racking up big deals when stocks are in trouble.
On the upside, Alphabet could see a new form of uptrend if it can avoid making a new low. That said, $2,500 is the key level to move higher.
As of the date of publication, Bret Kenwell had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.