Why Alphabet stock crashed 25% in the first half of 2022

Even mighty tech titans were doled out their fair share of market punishment.

| More on:
A male executive worker wearing glasses and a blue collared shirt looks at his laptop screen with a concerned look on his face and his hand to his forehead as he watches his screen.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) took a 24.8% header during the first half of 2022, according to data from S&P Global Market Intelligence.

When looking back at the chart to all-time highs of autumn 2021, Alphabet is off 28% from its peak. By comparison, the S&P 500 and Nasdaq Composite indexes are off 21% and 31%, respectively, from their all-time highs.  

So what

A confluence of events conspired to drag down the mighty Alphabet's stock -- and few of those events had much to do with business results. What started as a healthy market pullback early in 2022 widened into all-out carnage as inflation soared past 8% year over year, driven by higher energy, food, auto, and home prices.

In response, the Federal Reserve has started aggressively raising interest rates in an attempt to cool off the economy which, in turn, would cool off prices. As a reminder, higher interest rates lower the present value of risk assets like stocks.  

Thus far, the Fed's plan has done little to tame inflation, but it has pushed the economy to what some economists think is the brink of recession. Add in Russia's war on Ukraine, and it all creates a very gloomy outlook for the global economy.

About Alphabet: As just mentioned, its business seems to be doing just fine. In fact, in the first quarter of 2022, revenue and operating income increased 23% and 22%, respectively.

But since the bulk of Alphabet's revenue comes from advertising, the possibility of a recession has also weighed on shareholder sentiment. Ad spending tends to take a hit when the economy hits the skids, so there's worry that Google's growth is in for a severe cool-off.  

Now what

At this juncture, investors need to weigh Alphabet's longer-term prospects against the current valuation. Digital ads are still a steadily growing industry gobbling up traditional marketing, and the tech giant has lots of other irons in the fire, like its Google Cloud segment, that give it exposure to other secular growth trends. 

The stock now trades for 22 times trailing 12-month free cash flow and 20 times expected current-year earnings. It also has some of the deepest pockets around with cash and short-term investments of $121 billion net of debt.

If Alphabet can sustain its growth momentum over the long term, now might be a fantastic buying opportunity -- if you don't mind some ongoing elevated volatility this year and can sit on your hands for at least a few years.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients have positions in Alphabet (C shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A man looking at his laptop and thinking.
International Stock News

With Warren Buffett stepping down as CEO, will Berkshire Hathaway sell Apple stock?

Or will it find something else to invest in? Let's take a look.

Read more »

Man on his laptop standing next to data centres.
International Stock News

History says now is the time to buy Nvidia stock

History doesn't normally repeat itself, but it often rhymes.

Read more »

Woman relaxing and using her Apple device
International Stock News

16 words from Warren Buffett that should have Apple stock investors excited

Let's see what Buffett had to say and what it means for investors.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
International Stock News

Prediction: Warren Buffett may be shifting out of his Berkshire Hathaway CEO role, but he's not done investing

Let's take a closer look at what may be ahead.

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
International Stock News

Here's why I'm not too worried for Alphabet despite Apple's potential new AI-powered Safari search

Investors panicked when the possibility was floated, but take a step back and look at the bigger picture.

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
International Stock News

Should you buy Nvidia before May 19?

Nvidia has been firing on all cylinders, and we may have a chance to hear more about this top AI…

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
International Stock News

Should investors be concerned about Berkshire Hathaway's record $348 billion cash position and third consecutive quarter of no stock buybacks?

Here's what the treasure trove of cash and lack of buybacks signal, and if Berkshire is still an excellent value…

Read more »

Woman in business suit holds both hands out with a question mark above each hand.
International Stock News

AMD vs. Nvidia: Which artificial intelligence stock should you buy on the dip?

Which of these two chip stocks is the better option right now?

Read more »