Google parent Alphabet well priced for long-term investors

Alphabet (Nasdaq: GOOGL) (Nasdaq: GOOG) is the parent company of Google, YouTube, the Android operating system and much more. Alphabet’s business right now is largely reliant on online advertising, with more than three-quarters of revenue coming from advertising-related sources in the first quarter of 2023.

Advertising is a growing market, especially online advertising, but it isn’t immune to economic downturns. Unfortunately for Alphabet, in an economic downturn, many companies look for ways to trim expenses — and ad budgets are an early victim. Still, whatever ad budget remains is often spent with Alphabet.

Growth in global digital ad spending is forecast to remain sluggish this year. But by 2026, some expect it to total more than $800 billion, up from $550 billion in 2022.

Alphabet’s cloud computing and artificial intelligence operations are also likely to be growth drivers. Indeed, Alphabet’s cloud computing revenue was $7.5 billion in the first quarter, up 28% from the previous year. Meanwhile, the global AI market is forecast to grow from $142 billion in 2022 to $1.85 trillion by 2030.

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With recent price-to-earnings (P/E) and price-to-sales ratios below their five-year averages, Alphabet’s shares look attractively priced for long-term investors. (The Motley Fool owns shares of and has recommended Alphabet.)

Ask the Fool

From M.M., Walnut Creek, Calif.: Why do interest rates rise and fall?

The Fool responds: They’re influenced by many factors — such as inflation, the debt market (which includes Treasury notes, bills and bonds) and actions taken by the Federal Reserve.

Inflation has averaged about 3% annually over decades, though it has been fairly high in recent years, hitting 8% in 2022. (It was 13.5% in 1980 and nearly 18% in 1917. In 1932, it was negative 10.3% — deflation.)

To combat inflation, the Federal Reserve can try to slow the economy by increasing short-term interest rates via the “federal funds” rate — the rate banks charge each other when lending or borrowing funds. The Fed also sets the “discount rate” — the rate banks pay it to borrow short-term funds. The Fed can try to boost a sluggish economy by lowering rates, encouraging companies and people to borrow (and spend) money.

The federal funds and discount rates directly or indirectly influence the prime rate, mortgage interest rates and other interest rates, such as those for credit cards. The Fed can also influence rates by buying or selling bonds — which, respectively, injects money into or retrieves money from the nation’s supply.

From P.K., Chesterbrook, Pa.: I recently spotted two companies with similar stock prices in the same industry. While one has risen in price, the other has fallen. Can you explain this?

The Fool responds: The similar stock prices were mostly a coincidence. Every company is unique, even within the same industry. Each, with its own levels of cash and debt, profit margins and growth rates, will have its own strengths, risks and growth potential. Each company’s stock might be overvalued or undervalued and be likely to rise or fall accordingly.

The Fool’s School

When many people hear the term “the Dow,” they assume it refers to the entire U.S. stock market. The Dow Jones Industrial Average, though, is an index of only 30 companies.

The 30 companies are currently 3M, American Express, Amgen, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca-Cola, Dow Inc. (the chemical company), Goldman Sachs Group, Home Depot, Honeywell International, International Business Machines (IBM), Intel, Johnson & Johnson, JPMorgan Chase, McDonald’s, Merck, Microsoft, Nike, Procter & Gamble, Salesforce, Travelers Companies, UnitedHealth Group, Verizon Communications, Visa, Walgreens Boots Alliance, Walmart and Walt Disney.

Established in 1896, the Dow initially contained just 12 stocks, including now-obscure names such as U.S. Leather and National Lead. (General Electric is the most familiar original component, but it was dropped from the index in 2018.) The last component change was in 2020, when Salesforce, Amgen and Honeywell International replaced ExxonMobil, Pfizer and Raytheon Technologies.

Unlike many stock indexes, which are weighted by market capitalization and therefore have their largest components counting the most, the Dow is price-weighted. So whichever Dow companies have the highest stock price will be the ones most greatly influencing the average. Goldman Sachs, for example, with a recent stock price of $325, counts more than Apple, recently priced near $190 — despite Apple’s $3 trillion market value being far greater than Goldman’s $108 billion value.

The Dow is often used as a benchmark for the entire U.S. stock market and even the American economy. However, it’s worth remembering that while it’s diversified in terms of industries, it’s still made up of only very large companies. The S&P 500 index, with 500 companies, is arguably a better, broader measure of the U.S. market, though its components are also on the larger side.

Finally, beware of overexcited headlines in the media, such as “Dow plunges 400 points!” With the Dow recently near 34,000, a 400-point move is only about 1.2%. Focus on percentages, not points.

My Dumbest Investment

From P., online: My most regrettable investing move was selling 500 shares of way back in 2000 when the stock price was in the teens in order to buy a car. I netted a profit of about $3 per share. Ouch.

The Fool responds: Ouch, indeed. split its shares 20-for-1 last year, so if you’d hung on, you’d own 10,000 shares — recently priced near $130 apiece. That would total around $1.3 million. If the split hadn’t happened, you’d own your 500 shares and they’d be priced near $2,600 apiece, for a total value of $1.3 million. (Remember that a split mainly just changes the number of shares you own. With a regular stock split, a stock’s price is reduced proportionately when its share count is increased.)

Keep in mind that back in 2000, you couldn’t have known that by mid-2023 would command a total market value well north of $1 trillion. The company had only broadened its offerings beyond books in 1998, adding music, video and DVD sales, and it welcomed third-party sellers to its marketplace in 2000. If you were extremely bullish on Amazon’s future, you might have hung on to some or all of your shares — perhaps by buying a less expensive car. But if you weren’t, it wasn’t crazy to sell.

Who am I?

I trace my roots to 1880, when two brothers borrowed $200 and bought the Wooden Jacket Can manufacturing business in Buffalo, N.Y.. Corrosive contents tended to damage tin cans, so by 1884, I was making iconic glass jars for preserving fruit. (They’re now produced by Newell Brands.) Today, based in Westminster, Colo., with a recent market value near $18 billion, I specialize in sustainable aluminum packaging for the beverage, personal care, household products, aerospace and other industries — and for the U.S. government. I’m one of the world’s largest makers of beverage cans. Who am I?

Can’t remember last week’s trivia question? Find it here.

Last week’s trivia answer: The Clorox Co.