Nasdaq Bear Market: 1 magnificent growth stock to buy like there’s no tomorrow

Looking back to 2022, it will be tempting for investors to focus solely on the painful downturn that the major US stock market indices have caused. The bear market has torn them all apart, but the worst performer — by a country mile — is the Nasdaq composite. The technology-focused index began its decline more than a year ago and is still nearly 35% lower than its late-2021 high.

While defeat has sent many to the exit, seasoned investors know that this is part of the price of entry and that trailblazing wealth can still be made over time. Why do you ask that? Because every bear market in history has given way to a bull market, which historically lasts much longer. In addition, these occasional nosedives allow investors to buy companies with a proven track record at incredibly low prices.

One of those bear market bargains hiding in plain sight is Alphabet (GOOGL 1.01%) (GOOG 1.09%). Like many tech companies, current headwinds have hit stocks. Those with the foresight to step back and take a broader view will discover a stock they should buy as if there was no tomorrow.

Image source: Getty Images.

Call the search party

This year has not been a pleasant one for Alphabet shareholders, and it is easy to understand why some investors have had their faith shaken. In the third quarter, revenue of $69 billion only grew 6% year-over-year, though it would have been up 11% without the currency headwind. Perhaps even more troubling was the bottom line, as diluted earnings per share (EPS) of $1.06 fell 24%.

Glass-half-full investors will note that the company generated more than $16 billion in free cash flow even in the midst of its worst downturn in more than a decade.

The drop in revenue was driven by declining demand for its leading digital advertising services, as Google’s ad revenue grew just 2%. Advertising has historically been one of the first budget items to be cut in times of uncertainty because it can be easily reversed or increased without serious consequences.

Fortunately, Google Cloud fared much better as revenue grew 38% year over year, fueled by the ongoing digital transformation and secular shift to cloud computing.

Still, given the appalling top and bottom-line performance, it’s no wonder investors were alarmed by the results, which sent the stock down 9% the day after the report. It is now 41% below last year’s high.

However, investors can miss the big picture by focusing too much on a quarter’s results.

A snapshot

Rolling back the clock by just one year should provide investors with much-needed perspective. In the third quarter of 2021, Alphabet reported revenue of $65.1 billion, up 41% year-over-year. At the same time, diluted earnings per share of $27.99 grew 71%. Hardly a company’s performance at risk.

This look back at the past is instructive because it makes it clear that Alphabet, like many other tech stalwarts, is feeling the temporary tightness brought on by the recession. But more importantly, history shows that once economic headwinds ease, leading companies – such as Alphabet – will not only recover from recent losses, but also reach new heights.

More where that came from

If you think Alphabet’s growth is behind it, something else is coming.

Marketers can temporarily cut or even suspend their advertising budgets, but that’s a stopgap measure at best. It won’t be long before the advertising dollars start flowing again. If they do, Alphabet will be there to answer the call.

Google Search is the funnel that will drive future growth, with a dominant 92% of the global market. This fuels Google’s leading digital ad business — another area it dominates — and controls about 30% of global digital ad spending, according to Digiday.

Then there’s Google Cloud, which has risen to become the third largest global infrastructure service provider AmazonWeb Services (AWS) and Microsoft Azure blue. However, Google continues to gain market share and is the fastest growing of the three. Google’s cloud computing revenue grew 48% year over year in the third quarter, while Azure and AWS were up 35% and 27% respectively, according to Canalys.

The common thread here is resilient companies with great opportunities, temporarily bogged down by stormy macroeconomic headwinds. All this suggests a stunning recovery for Alphabet stock once the economy picks up again.

Let’s talk about the price

Given Alphabet’s undisputed leadership in both search and digital advertising, and its strong position in cloud computing, the stock is selling for a price approximately 4 times next year’s revenue, an extremely reasonable valuation given its history of strong growth and sustained outlook. It’s also near the cheapest valuation of the stock ever.

The preponderance of the evidence suggests that the current economy is temporary weigh on Alphabet’s performance.

“This too shall pass,” as the old saying goes. If so, it now seems like a stroke of genius to buy shares of Alphabet.