In recent trading days, shares in Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) have started to pull back. After climbing back to prices near $140 per share, GOOG stock has slipped slightly.
This may be of concern to both investors holding the “Magnificent Seven” component’s shares, as well as those still deciding whether to enter a position.
Yes, there has been a company-related development in recent days, which may help to explain why the stock has moved lower. However, the more likely root cause has to do with factors that have little bearing on the long-term bull case.
Sure, on the surface, what’s affecting GOOG’s performance in the immediate term may seem like something that could hinder the stock’s ability to continue bouncing back. However, on closer inspection, it’s questionable whether this is the case.
In fact, as I’ll explain below, any further near-term turbulence with shares may work in your favor.
GOOG Stock: The Real Reason Behind its Drop
Look at recent headlines regarding Alphabet. At first, you may have a tough time figuring out why shares have suddenly fallen off an upward trajectory. There was a bit of news that made headlines a few days back.
However, this headline, which had to do with rumors that the company was looking to drop Broadcom (NASDAQ:AVGO) as an AI chip supplier, came out on Sep. 21, and the GOOG stock sell-off began on Sep. 20. Hence, something else was the primary driver of this drop in price.
That would be the latest moves by the Federal Reserve regarding interest rates. While the central bank paused on rate hikes this month, remarks made by Fed officials suggest rates will stay “higher for longer.”
Growth stocks, including more established growth stocks like this one, are sensitive to macro developments related to interest rates.
In addition, it’s possible that investors who jumped into GOOG as its AI prospects improved engaged in some profit-taking. Such profit-taking may continue, as more investors fear a short-term reversal.
Reasonably Priced Relative to Growth
On the surface it may seem like GOOG stock has little chance of bouncing back to its past high-water mark of nearly $150 per share.
However, while a “higher for longer” environment means stocks will struggle to experience multiple expansion, that doesn’t mean further rounds of multiple compression are on the table.
This big tech stock trades for around 23.3 times forward earnings, a sustainable multiple given Alphabet’s growth prospects.
As discussed in my last article on GOOG, the company continues to make the right moves, both in its AI endeavors, as well as with other efforts that bode well for future results, such as Alphabet’s aggressive moves to reduce operating costs/improve efficiency.
Add in trends like a rebounding digital ad market, and the company is likely poised to meet/beat earnings growth forecasts. Per sell-side estimates, Alphabet’s earnings will grow 18.3% in 2024, and 16.1% in 2025.
A Path of Continued Gains Remains
If growth comes in line or above of forecasts over the next two years, chances are GOOG will move higher, in tandem with increased earnings. Better yet, although there may be little to no room for multiple expansion to occur soon, that may not be the case in mid-to-late 2024.
Why? The Fed’s current cautiousness could cool. if a “soft landing” is achieved, and inflation continues to come down in the coming months. Even if rates come down slowly because of this, expect any reduction in interest rates to have a positive impact on Alphabet’s valuation.
As a path to continued gains remains, if you own GOOG stock, you may want to think twice before joining in on the profit taking. Declines from here could be minimal at worst, especially if the company reports strong quarterly results next month.
GOOG stock earns a B rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place