The Alphabet share price has fallen 35% in the past year. I think it is starting to look like a bargain for my portfolio. Here is why.

Alphabet has a great future

Normally when a share price falls, it either means it was overvalued before or else the company’s business prospects have changed.

Arguably Alphabet was overvalued before, although its current price-to-earnings ratio of 19 looks attractive to me. I think its business prospects remain outstanding. One mistake some investors make when looking at Alphabet is to focus on short-term trends. For example, the shares recently fell after the company’s third-quarter results failed to meet Wall Street expectations.

To be clear, they were still strong in many ways. Revenues grew 6% year-on-year and came in at $69bn. Net income fell sharply from the same quarter the prior year but was nonetheless almost $14bn.

As long-term investor, though, what excites me about Alphabet as a growth stock is not its quarterly performance. I like the way it is hardwired into the daily lives of hundreds of millions of users. From Gmail to YouTube, the switching cost for many users makes them loyal to Alphabet’s services. Not only do few if any competitors offer as good a product, many users have so much content on Alphabet sites they are unlikely to jump ship.

Compelling business model

That enormous user base and stickiness helps explain how Alphabet is able to make mammoth profits.

It has been able to monetise that through selling advertising. Its huge digital presence and deep user understanding means Alphabet is a key player in the global advertising market, something I expect to last for many years. There is a risk that a decline in advertising spend could hurt revenues and profits. That already showed up in the recent results and there could be worse to come.

As a long-term investor, though, I think Alphabet has a great business, and I would be happy to own a part of it at the right price.

Is this growth stock attractively priced?

Lately, I have been weighing up the pros and cons of adding Alphabet back into my portfolio at its current price.

I do find the valuation attractive but there are a lot of other quality shares currently trading for what I think are good prices. In the long term, though, I feel upbeat about the prospects for Alphabet and would be happy to own its shares. That is why I see it as a bargain. If I had spare cash to invest right now, I would snap up Alphabet shares for my ISA.

In fact, the shares have lost a quarter of their value over the past year. An underwhelming quarterly earnings report released yesterday could further hurt the shares. While revenues were 6% higher than in the same period last year, net income fell 26%.

Why I’d buy

Despite that, I see the current price of Alphabet shares as cheap.

The company has a business model that I think is world class. The costs of building a competitive platform would be very high. That alone acts as a barrier to entry for possible rivals. Alphabet’s businesses have a large installed user base. There would be a switching cost for them in terms of time and effort that might keep them loyal to Alphabet even if a rival offered an equivalent service.

Alphabet’s product ecosystem enables it to serve up ads without having to spend lots more money. Compare it to a traditional outdoor advertising firm. If such a business wanted to display more ads, it would need to own or rent more poster sites. Alphabet, by contrast, has a very small marginal cost when increasing the number of ads it displays online – meaning that it can make excellent profit margins.

Those characteristics add up to a profitable operation with a large opportunity in years to come and a massive captive market. I see that as a great business.

Alphabet shares look cheap

The key to successful investing, however, lies not only in buying into great businesses. I also need to build my stake at an attractive price.

The drop in Alphabet shares means that they now trade on a price-to-earnings ratio of just under 20. I see that as cheap for a business with the future earnings potential I believe Alphabet has. Admittedly earnings in coming years may be lower than before, if the company’s latest numbers mark the beginning of a trend. That is, increased competition from rivals such as TikTok and tightening advertising budgets at customers pose a risk to both revenues and profitability at Alphabet.

As a long-term investor though, I think the company’s scale and competitive advantage mean it will continue to be a profit machine in future. Taking advantage of the fall in Alphabet shares to add them to my portfolio could turn out to be a rewarding move when looked back on five or 10 years from now. That is why, if I had money available to invest today, I would make that move.

As I see it, there were two main disappointments. The first is that revenue growth slowed significantly. The second is that increased expenses led to lower earnings.

Neither of these is a good thing, but I don’t think that they justify a 33% decline in the stock since the start of the year. As a result, I’m seeing this as an opportunity to buy Alphabet shares.

Revenue

Over the last decade, Alphabet’s revenue has been growing at an average of 20% per year. Last night, the company reported earnings growth of 6%, with the core advertising business up 3%.

Management put the slow growth down to declining advertising budgets among customers. Most notably, this came from cryptocurrencies and debt-related products.

I think that the slowdown in revenue growth will have surprised a number of investors. I believe that a lot of Google shareholders thought that its customers viewed it as indispensable.

Personally, I didn’t think this. While Google offers a powerful platform for advertisers, I didn’t expect it to prove immune to the effects of lower marketing budgets.

I’m therefore not surprised by the slowing growth. I actually think that a 6% revenue rise in a difficult economic environment is very respectable. 

Income

For me, the decline in earnings is much more significant. Last night’s earnings revealed that Alphabet’s operating margin had decreased from 32% a year ago to 25% last quarter.

This, for me, is more alarming. I didn’t expect Google’s operating costs to increase as significantly as they have done.

In response to this, management said it intends to make the company more efficient. This involves slowing the pace of hiring and scrapping some of its more cash-intensive projects.

The company’s ability to control its costs is something for me to watch closely moving forward. Part of my reason for investing in the stock was because the business could maintain high margins.

As such, I welcome the decision to pause some of its less rewarding projects. Focusing on its core operations right now looks to be the right thing to do.

Should I buy more Alphabet shares?

Over the last 12 months, Alphabet has produced just over $5 in earnings per share. That has been steadily declining through each of the last four quarters, though.

If Google stock falls below $100 per share, then that will put the stock at a price-to-earnings (P/E) ratio of under 20. At that price, I’d look to add to my investment.

I’m expecting the next year or so to be difficult for Google as advertising budgets continue to come under pressure in a difficult macroeconomic environment. But that doesn’t put me off.

Fundamentally, I think Alphabet is an extremely strong company with a terrific product that it’s nearly impossible for competitors to emulate. Over time, I think this will pay off for me.

I think they offer great value for my portfolio though, and would consider buying them now if I had spare money to invest. Here is why.

Long-term investing

I am not a short-term trader trying to predict swings in market prices. Instead, I am a believer in long-term investing. I aim to buy small stakes in great companies I think have outstanding business prospects over the course of years or even decades.  

The benefit of such a long-term approach is not just that it can take time for investors to fully appreciate the potential of a company. Rather, it reflects the fact that a great business model can get even better over time, thanks to economies of scale.

For example, building the digital architecture for a service like Alphabet’s YouTube takes significant resources. But once it is up and running, the marginal cost of adding new users is small relative to the potential rewards.

In the same way, if YouTube decides to extend five second adverts to 10 seconds, what would happen? Some users might leave, but I reckon many of them would keep watching – and the platform could earn a lot more from the adverts than before.

The shares and the value of a moat

As I said, it is the long-term potential of the Alphabet business model that attracts me. Billionaire investor Warren Buffett talks about the advantage of a business having a moat. By that he means a competitive advantage that can help give it pricing power. YouTube demonstrates this perfectly, just as the core Google service does. An installed base of users the business understands well and who know how to use its products is a massive business asset.

Alphabet works to keep them through everything from thoughtful interface design to technical reliability. But key to its business prospects is the fact that it enjoys a massive moat. Indeed, Buffett has publicly said he made a mistake by not investing in Alphabet, even though he saw the potential in the business. “We blew it” he has told shareholders in Berkshire Hathaway.

Why I see value

If the business is as good as I think though, why have Alphabet shares been falling?

Partly it reflects some of the challenges the business faces. For example, as many countries face a recession, companies may cut back their advertising budgets. That could hurt sales and profits at Alphabet, for whom advertising is a key source of revenue.

But in the long term, I see Alphabet as a company whose technology, user base and brands give it an outstanding business moat. I think that could help it produce very strong earnings long into the future.

On that basis, I think the current price-to-earnings ratio of 19 might offer me excellent value as a long-term investor.

Here are two such shares I think could help improve my wealth for years to come.

Alphabet

Alphabet (NASDAQ: GOOG) is best known as the parent of online search and advertising giant Google. But it also owns a range of other businesses, from YouTube to Waymo. I think the core business could continue to see strong growth in future. On top of that, I expect revenues to grow due to the assortment of other services beyond Google.

Google’s dominant position could become more and more lucrative as digital tools play an ever greater role in the lives of people across the globe. It has a proven business model underpinning Alphabet’s incredible financial performance. Last year, for example, Alphabet recorded earnings of $76bn. For a company that is less than three decades old, I regard that level of profitability as outstanding.

Despite its strong competitive advantage, pricing power and large user base, over the last year the Alphabet share price has slumped 26%. Growth stocks generally have fallen, but I think in the case of Alphabet this has been overdone. It now trades on a price-to-earnings ratio below 20.

I do see risks here. For example, tightening client advertising budgets could hurt both sales and profits at Alphabet. But I see the company as one that is likely to do well over the long term. If I had spare money to invest today, this is one of the growth stocks I would happily add to my portfolio.

JD Sports Fashion

Over the past decade, the performance of retailer JD Sports Fashion (LSE: JD) has been very strong. Revenues and profits last year both hit an all-time high.

Can this impressive performance continue in the next decade and beyond? I think it may. The market for leisurewear and sports accessories is likely to keep growing, in my view. JD has a proven formula that it can apply in key markets across the world, including the US. I see that as a massive opportunity.

The company has been consistently profitable and seems to benefit from strong brand loyalty among its large customer base. Despite those strengths, the JD Sports share price has tumbled. In the past year it has fallen 55%. That means that the company now has a market capitalisation of under £5bn.

I see that as excellent value and would happily buy more shares in the business if I had spare cash to invest right now. There are risks: new management might struggle to create the positive momentum of the former long-term leader. But with a proven formula in an area where I expect to see robust demand, I think JD’s international growth platform might help propel it to new heights in future.

According to Buffett, investing success doesn’t take a huge amount of intelligence. Patience and discipline are far more important on the road to getting rich.

Buffett’s approach has two parts. The first involves identifying predictable businesses and the second involves waiting for them to be available at attractive prices.

With both the FTSE 100 and the S&P 500 down this year, I think that there are some stocks that fit the bill. So here’s how I’d invest £1,000 using the Warren Buffett method today.

Google

Top of my list is Alphabet (NASDAQ:GOOG). Both Warren Buffett and Charlie Munger have previously said that they regret not buying shares in the company a long time ago. 

Google receives around 5bn search queries per day and accounts for around 84% of the global search engine market. It dominates the online search industry and I don’t see that changing any time soon.

With such a large market share, there might be a risk that the company’s growth is mostly behind it. But I think there are two things that offset this risk.

The first is that the organisation continues to generate strong revenue growth. Over the last five years, the company’s revenue has increased by an average of 23%.

Second, the stock is down 33% since the start of the year. At today’s prices, I think that the business can provide an attractive return just by growing steadily.

I think that Google is a great example of a stock to buy for my portfolio using the Warren Buffett method. That’s why I’d allocate £650 of a £1,000 investment into the stock.

Aviva

With the remaining £350, I have a few ideas on my radar. I think that Forterra, Howden Joinery Group, and Starbucks are all predictable businesses at attractive prices today.

Any of these would, in my view, be a good investment for me with £350. But looking to follow the Warren Buffett method, I’d invest in Aviva Preferred 8.375% (LSE:AV.B) shares.

I think this fits the bill perfectly in terms of predictability at an attractive price. And a lot of Buffett’s success has come from buying preferred stocks.

Unlike common stock, preferred stocks pay a fixed dividend that can’t be lowered. That makes their future cash generation highly predictable.

In the case of Aviva’s preferred, each share pays 8.375p per year. At today’s prices, that’s a return of 7.3% in perpetuity, which I see as attractive.

The downside to this type of investment is that the dividend won’t increase. And there’s a risk that rising interest rates might cause the stock to fall as the dividend yield looks comparatively less attractive.

For me, though, this isn’t a problem. A falling share price just gives me the chance to reinvest my dividends at a higher rate. 

Even if the share price stays where it is, though, I can generate a good return by reinvesting the income I receive. Starting with £350 today, a 7.8% return means my investment could be worth £3,280 after 30 years.

Alphabet

Shares in US tech giant Alphabet (NASDAQ: GOOG) have fallen 23% over the past year and now trade on a price-to-earnings ratio of 21.

But while the share price may have been moving downwards, I think Alphabet’s future prospects get better and better over time. Its Google search engine is so widely used that it is is almost a license to print money. Other parts of the business like YouTube are also incredibly popular. The company’s installed customer base and technical expertise gives it a massive competitive advantage as it makes it hard for rivals to lure users away. That gives Alphabet pricing power.

Even if it invested no more in its business and let it stand still, I think Alphabet could produce huge profits for years to come. But it is investing in growing its business, which makes it more attractive to me as a long-term investor. Last year’s record profit of $76bn, for example, was far ahead of the $40bn Alphabet had earned in the prior 12 months.

There are risks that come with success on such a big scale. Regulators may try to break the company up, or take some of its earnings by imposing large fines on it. Alphabet works in a range of very complex regulatory regimes. But the long-term story here is compelling. I would be happy to buy Alphabet shares now and hold them for the coming decade.

boohoo

If Alphabet shares have had a hard year, their poor performance pales in comparison to online retailer boohoo (LSE: BOO). The fashion merchant has seen its share price collapse 84% in the past year. I have bought in, only to watch the shares fall even further.

So why do I still see these as shares to buy now for my portfolio given that background? In short, I think the underlying business here has attractive characteristics. People need clothes, more and more shoppers like to buy them digitally, and boohoo has developed a competitive cost model that could stand it in good stead during economically tough times.

The company has proven in the past that it can be very profitable. It continues to scale up operations in the US and I expect in years to come the international footprint could be a significant driver for further profits. Meanwhile, there are definitely challenges. boohoo’s emphasis on competitive pricing can mean inflation poses more of a risk to profits in coming years than it does at rivals that can pass it on to customers more easily.

But its business model has been proven in the past, it has a strong collection of brands and I think the market space in which it operates has substantial space for further growth. I continue to see boohoo as shares to buy for my portfolio this month.

Heading Dow-wards?

The sole reason for the drop in the Alphabet share price is its recent 20-to-1 stock split. Those who held the stock when the US market closed on Friday were awarded 19 additional stocks for every stock they held. The value of each stock has been divided by 20 as well.

According to the board, the reason for this split is to encourage higher trading volume while making access to Alphabet stocks easier. However, this is a double-edged sword. While a ‘cheaper’ stock encourages more volume to boost its share price, it also means that it’s more vulnerable to being shorted and driving the share price down. This is a genuine risk considering the negative sentiment surrounding the current bear market.

Nonetheless, the main prospect from the stock split is Alphabet’s potential entry into the coveted Dow Jones index. The index includes 30 of the most prominent companies listed on US stock exchanges. Given Alphabet’s prominence, analysts are predicting it’s a matter of when and not if the NASDAQ-listed firm gets inducted. If this happens, I expect the Alphabet share price to rally, as institutions tracking the index will have to purchase the stock.

What now?

Despite the excitement surrounding its stock split, the Alphabet share price is still down 20% this year. Fears of a recession have led investors to speculate that growth in advertising spending, Alphabet’s main source of revenue, will stall. As such, analysts’ earnings per share (EPS) estimates have seen downward revision over the last 90 days.

Alphabet’s stock plunged after it reported its Q1 earnings results, as some key figures fell short of analysts’ expectations. Slowing advertising spending from the Russia-Ukraine conflict along with currency headwinds were some of the reasons cited by management for the underperformance. But with Alphabet set to report its Q2 results next Tuesday, I’m hoping that there will be better news. EPS is expected to come in lower than a year ago. But I’ll be paying close attention to the guidance provided, in hopes the group is on track to achieve 15% revenue growth for the year.

Searching for profits

Alphabet stock is currently the largest holding in my portfolio, so should I be buying more? Well, the company has a flawless set of financials to begin with. A 5.1% debt-to-equity ratio and a mountain of cash ($134bn) puts it in an excellent position to grow and withstand an economic downturn. Additionally, it boasts high-quality earnings with excellent growth prospects from its latest developments. These include YouTube Shorts, Google Cloud, Google Workspace, Waymo, and even an improvement to Google Search.

So, with an average price target of $158.98, this gives the current Alphabet share price a 40% upside. As such, I’ll be looking to buy more of its stock as I believe Alphabet has the potential to substantially increase my wealth in the long term.

Banks

The major US banks report their quarterly earnings this week. I’ll be keeping a close eye on what they say.

Banks play a central role in economic activity. As such, their reports are often seen as a good indicator of the state of the wider economy. If the bank reports indicate that the US economy is slowing substiantially (or that it is about to) then I think that a stock market crash could be imminent. 

A bleak economic outlook could cause estimates of corporate earnings to come down. And I think that lower earnings estimates is likely to result in lower share prices.

Share prices

In the first half of the year, stocks have been falling due to high inflation and rising interest rates weighing on share prices. Despite this, analyst expectations for corporate earnings remain strong.

Take Alphabet (NASDAQ:GOOG) for example. Of the 13 analysts offering earnings forecasts for Alphabet this year, only one has revised their forecast down recently.

Alphabet’s share price has fallen by 17% since the start of the year. As a result, the stock now trades at $2,400 per share.

The company is forecast to generate $110.62 in earnings per share this year. The current share price therefore implies a price-to-earnings (P/E) ratio of around 21.

At this level, I think Alphabet shares look like good value. As a result, I’ve been buying the stock this year.

Earnings

The difficult economic environment might cause Alphabet’s earnings to come in lower than expected, though. If this happens, the stock starts to look expensive. 

Alphabet’s earnings this year coming in at $100 per share would mean that the current share price implies a P/E ratio of 24. Earnings at $90 mean the P/E ratio is 27.

At these levels, Alphabet stock looks much less attractive. So if it seems that Alphabet’s earnings are going to be closer to $90 than $110, I expect the stock to fall significantly to compensate for this.

It isn’t just Alphabet stock that I’m expecting this from. I think that a decline in expected earnings might well lead to a crash in share prices across the board.

A stock market crash?

So far this year, share prices have been falling as rising interest rates weigh on valuations. Stocks look cheap right now because they trade at lower P/E ratios than they used to.

If earnings expectations come down, P/E ratios will increase and stocks will look expensive again. I think this will cause share prices to crash. 

I think that the earnings reports from the major US banks this week might cause expectations of future earnings to fall. As such, I’m preparing for a stock market crash in the near future.

For investors and consumers alike, inflation has one of the dominant themes of the first half of 2022. According to the latest readings, prices are around 8% higher now than they were a year ago.

It also looks as though inflation isn’t over yet. The Bank of England warned this week that the situation is likely to get worse before it gets better.

Inflation is also problem for businesses because it pushes up costs. Higher costs means lower margins, which in turn means lower earnings. There are two types of inflation-resistant businesses. The first type are able to pass the higher costs on to customers by increasing their prices.

The second type are able to nullify the impact of inflation by having low capital requirements. These businesses are protected from inflation because their costs increasing makes little difference to the overall business.

I think there are two stocks in my portfolio that especially inflation-resistant. Furthermore, I’d be happy buying either at today’s prices.

Games Workshop

My first stock to buy now is Games Workshop (LSE:GAW). The company is protected from inflation by its low capital requirements.

Games Workshop’s ongoing investment requirements are low, accounting for less than 1% of the cash it generates. Furthermore, the business produces £148m in operating income using just £96m in fixed assets.

As a result, even if inflation were to double Games Workshop’s input costs, the business would still generate substantial cash flows for its shareholders.

Games Workshop’s share price has fallen by 33% since the start of the year. At these prices, I’m happy to increase my ownership in the business.

Google

I also think that Google (NASDAQ:GOOG) is a great stock and I’m looking at buying it now. Unlike Games Workshop, Google’s main protection against rising costs comes from its pricing power.

Google is part of a conglomerate. But the overall company is dominated by the core search engine business, which generates around 99% of total revenues.

With around 4.3bn users, Google is the largest digital advertising platform. It’s significantly bigger than its next largest competitor, Meta Platforms, which has around 3.6bn users.

This means that Google has something that its customers can’t get anywhere else. Companies that want to reach the most people have to use Google, which gives it pricing power.

As with Games Workshop, Google’s share price has been falling lately. Since the beginning of January, Google shares are down around 25%, bringing the stock to a level that I’m happy buying at for my portfolio.

Recession risk

Both stocks have the same major risk. If a recession slows down spending, then both businesses could find their profitability impacted.

In my view, though, this risk is offset by the discounted price of each company’s shares. With neither company having any substantial debt, I think that the P/E ratio is a good metric to use for valuing these businesses.

Games Workshop’s stock trades at a price-to-earnings (P/E) ratio of around 18 and Google’s share price implies a P/E ratio of around 20. With modest growth, I think that both businesses can be great investments for me over the next decade.