Google Tumbles, But Can it Recover?

With Google hovering near its lowest point this year, is the decline part of the broader tech sell-off, or are there underlying issues that could concern investors?

Birds of a Feather

Alphabet, Google's parent company, has tumbled over 20% since peaking in February, although it has recovered slightly and is currently down 12% year-to-date (YTD). However, several other AI-backed tech firms have encountered double-digit losses this year, with all former "Magnificent Seven" giants in the red. The sector faces challenges due to the arrival of China's DeepSeek, the Fed's decision not to lower interest rates, and economic uncertainty. However, there is a particular cause for concern in Google’s case, as its decline began immediately after reporting poor Q4 earnings, from which it has yet to recover fully.

The company's shares plummeted 9% in the aftermath of the earnings report, despite beating analyst estimates. Investors appeared to be troubled by the slower-than-anticipated revenues for the coming year and the $75 billion earmarked for building out its AI capabilities. This expense could be ill-timed, as investors seem to be souring on the idea of massive spending on artificial intelligence that has not yet generated notable returns on investment. Since the earnings report, Google has continued to spend even more, scooping up cybersecurity firm Wiz for $32 billion, its largest acquisition to date. This has weighed on the stock's decline.

Can it Recover?

Despite the declines, analysts remain steadfast in their outlook with a "buy" rating and expect the stock price to rise over the next 12 months. The average target price of $217.29 per share implies not only a full recovery but an extra 30% upside from the current price. With a surprisingly low P/E ratio of 20.8 for a tech company, Alphabet's valuation is below the average of the S&P 500.

Given these conditions, it is unsurprising that Alphabet features on lists of "buy the dip" stocks, with analysts citing the company's projections of double-digit sales growth and increasing operating margins. Even with the nervousness surrounding AI, Google's cloud division managed to achieve 30% sales growth. However, ad revenue is the largest source of income for the company. With investors concerned about a potential economic slowdown in the US and Google’s performance tied to it, businesses may cut back on advertising to maintain margins. This could pose a short-term challenge for the company, but if confidence in the US economy improves, Alphabet could be one of the biggest beneficiaries.

V-Top Signals Further Breakdown?

The formation of a V-top pattern in Alphabet’s price chart raised the possibility of a potential decline to $120 if $140 gives way to bearish price action. However, a head-and-shoulders pattern could also form instead, with the neckline support at $150 offering a bounce towards the right shoulder near $190 if $180 breaks.

Source: SpreadEx / Alphabet

Key Takeaways

Alphabet faces challenges due to economic uncertainty and concerns over its AI spending, but analysts remain optimistic about its long-term prospects due to its strong fundamentals and growth projections.