With nine and counting services having more than a billion users each, many think Alphabet has the widest business “moat” the world has ever seen. Through Search, Chrome, Android, YouTube and Gmail, to name a few, the company has literally embedded itself into society’s everyday life. And as if it wasn’t dominant enough before Covid-19, the pandemic only gave Alphabet another boost.
2021 sales surged 41% to $257 billion, producing a net profit for the company of more than $76B. That is a very healthy 30% net profit margin for a company that employs little debt and is still growing at an above-average rate. Furthermore, 2022 revenue is expected to approach $290B, up almost 13% from the year before.
Yet, following the spectacular pandemic surge, the stock has been quite a disappointment so far this year. After reaching an all-time high of $151.55 in early-February, GOOGL has been losing ground ever since. Yesterday, the stock closed below the $100 a share mark, down 34.5% in less than eight months. Given the undoubtedly very high quality of the business, many see this dip as a buying opportunity.
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And we think they are right, but only in the short and long run. The mid-term, unfortunately, looks a lot messier. That is because the drop to $99.27 so far looks like a textbook five-wave impulse. We’ve labeled it 1-2-3-4-5 in wave A, where wave 4 is an expanding triangle.
According to the Elliott Wave theory, a three-wave correction in the other direction follows every impulse. This means that we can expect a recovery of at least 25% up to $125 in wave B as soon as wave 5 of A is over. As long as Alphabet trades below $151, however, the odds favoring another notable decline in wave C are going to remain high.
It is impossible to tell how low the can bears drag the stock in wave C. Nevertheless, they should at least be able to breach the bottom of wave A. In our opinion, investors should take advantage of any such weakness to establish long-term positions in Alphabet. That’s precisely what we plan to do.
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Disclosure: The author holds a long position in Alphabet stock in The EWM Interactive Stock Portfolio.
