- Alphabet stock has lost a third of its value since its November peak on growth concerns
- Alphabet is forecast to report single-digit sales growth when it reports its third-quarter earnings tomorrow
- The company has a vast reach in the digital economy that's hard to challenge, making its business recession-resilient
It's been hard to feel optimistic about social media stocks since the beginning of the year as companies in all business sectors cut back on ad spending to weather tight financial conditions.
Last week, the steep drop in Snap (NYSE:SNAP) shares after the company's latest earnings report added even more fuel to the fire, leaving the market concerned about the sector's upcoming reports.
Despite this gloomy outlook, I don't think investors should paint all social media names with the same brush. I see a compelling case to buy the shares of Google's parent company, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) should the stock drop on earnings weakness.
The California-based company has lost about a third of its value since its November peak on concerns that the owner of the most popular search engine in the world will see a decline in sales after a massive expansion during the pandemic.
According to analysts' consensus estimates, Alphabet is forecast to report single-digit sales growth in its third-quarter earnings tomorrow after the market close. Aside from one quarter at the beginning of the pandemic, that would mark the weakest period for Google's parent since 2013.
Source: InvestingPro
Threats to Alphabet's earnings are real and may cause some turbulence in the short run, but a buy case for Google's parent stock isn't very complicated, in my view. The company's vast reach in the digital economy is hard to challenge, making its business recession-resilient.
Google has a monopoly in the search-engine market with about 90% market share outside China. Search is also the major profit-generator for Alphabet. Google Services segment, which includes Search, generated $22.8 billion in operating income in the second quarter, with an operating margin of 36.2%.
Alphabet has maintained that dominance in the search business due to its massive investments and innovations, which are paying off. The company's improving AI capabilities are providing better user experiences and making it much harder for competitors to break Google's grip.
Another unique strength that Alphabet holds in the social media segment is that it controls the largest video search engine, YouTube, which offers a social media platform, and streaming capabilities, making it a highly targeted product for both young and old audiences.
In August, Pew Research released a comprehensive survey of American teens and social media. A whopping 95% of teens surveyed said they use the video platform. More teens reported visiting YouTube "almost constantly" than they did any other app. 
In addition to these strengths, Alphabet is in a strong position to capture the market share from its peers, including Meta Platforms (NASDAQ:META) and Twitter (NYSE:TWTR).
For example, there is a lack of visibility on Mark Zuckerberg's metaverse venture, which is an effort to arrest the decline in popularity of its flagship Facebook platform. We don't know how long it will take for this massive undertaking to pay off.
Similarly, no one knows how Elon Musk's bid to restructure Twitter will shape up if he succeeds in acquiring the company. This upheaval in the social media landscape means companies will divert more of their ad dollars to Alphabet-owned properties where the engagement is growing.
While other social media companies struggle to retain their subscribers and attract a limited pool of ad money, Alphabet's other businesses are also showing strong growth, further diversifying its business.
Sales in the Google Cloud division—a fast-growing market segment where the company commands the third position after Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), are showing strong momentum. Google's cloud sales surged 36% in the second quarter from a year earlier to $6.28 billion.
Moreover, this month, Google announced a broad swath of updates to its cloud offerings to close the gap with rivals, aiming to capitalize on its strength in artificial intelligence.
Bottom Line
Google's earnings tomorrow may show some weakness, hurt by companies' reduced ad spending. Still, it's one of the best mega-cap stocks to buy after it has lost more than 30% of its value. The company is well-positioned to perform well during any potential economic downturn due to its dominance in the digital ad market and strong growth momentum in other areas of the digital economy.
Disclosure: At the time of writing, the author was long on Alphabet stock. The views expressed in this article are solely the author's opinion and should not be taken as investment advice.