The market has become increasingly wary of a slowing economy and the possibility of a recession. It’s becoming a central talking point among executives in nearly every earnings call this quarter. Advertising, in particular, is bracing for a tough environment, and companies have begun to aggressively cut advertising spend.
But not all advertising agencies are created equal — Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) could withstand a dearth of ad spending surprisingly well. Here’s why.
Ad spend will likely be reduced from bottom to top
Businesses naturally try to spend less money when times are tough, and advertising can be a way to tighten their belts. But few things in life are created equal, and not all forms of advertising will experience the same degree of pushback.
For example, the frames of Procter & Gamble recently spoke about how the company has cut ad spend, but also shifted dollars, shifting money from TV at scale to more digital formats, where it’s easier to track ROI .
A recession could reduce ad spending across the board. Still, the hardest hit will likely be lower-quality ad platforms, those with smaller audiences, or an inability to measure and track their ads.
Alphabet lies near the top of the mountain
Luckily for Alphabet, the company rules the digital playground we call the internet. According to data from SEMrushGoogle.com and YouTube.com are the two most visited websites in the world in June 2022, and it’s not even close.
The two sites saw around 94 billion combined visits in June; the third-place website only had 10.6 billion, which shows how big the gap is between Alphabet and the rest. Statistics of Similarweb indicate that engagement is also strong. Users spend nearly 11 minutes viewing nearly nine pages each time they use Google.com. Meanwhile, users spend nearly 22 minutes on each YouTube visit, visiting about 12 pages.
I can’t speak for marketing departments around the world, but it looks like Google and YouTube would be the last platforms to see their ad spend cut, as they are the most dominant with viewers.
Alphabet acknowledged the potential economic tailwinds ahead in its second-quarter earnings call, but the quarter’s numbers indicate business is holding up. Google earned $56.3 billion in ad revenue in the second quarter, a 12% year-over-year increase, and YouTube ad revenue rose 4% to $7.3 billion .
Yes, total revenue grew only 16% (excluding a 3% headwind) in the second quarter, which is lower than the company’s 23% CAGR over the past three years . But Alphabet is arguably better positioned than anyone to weather the economic storm hitting the advertising industry.
Where stocks are valued today
Investors could get a great buying opportunity if stocks continue to slide on recession fears. The median of the titer price/earnings ratio (P/E) over the past decade was 27, but the stock is lower than today, with a P/E of 22:
On the one hand, a lower valuation is just because growth has slowed; analysts believe the company earnings per share (EPS) will grow by an average of 11-12% per year over the next three to five years. The company’s annual EPS growth over the past decade has averaged 20%.
So maybe stocks aren’t a good deal here, but you could say the stock’s valuation is still reasonable today, despite slowing growth. The stock will only become more attractive if it falls further. Investors get a technology company that has a virtual monopoly with its two main advertising businesses. You’ll sleep much better at night holding Alphabet than arguably any other advertising medium on Wall Street.
10 stocks we prefer to Alphabet (A stocks)
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and Alphabet (A shares) was not one of them! That’s right – they think these 10 stocks are even better buys.
* Portfolio Advisor Returns as of August 11, 2022
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. justin pope has no position in the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.