While I’m bullish on Alphabet Inc (GOOG, GOOGL), this does not mean that the investment is a no-brainer.
When it comes to the tech industry, a winner can quickly turn into a disaster. Just look at companies like Yahoo! (YHOO), BlackBerry (BBRY) and Nokia (NOK). They all were dominant players but ultimately failed to keep up with the intense competition.
Now as for Google stock, there are still lots of reasons to be upbeat. The company has beaten Wall Street expectations for three straight quarters and there has been a strong focus on keeping costs at disciplined levels. Besides, GOOGL trades at a reasonable 17 times forward earnings.
But it’s always a good idea to keep an eye on the inevitable risks, of which there are four to consider with Google stock:
Google Stock Risk #1 — Social Media
Alphabet has definitely invested heavily in social media, especially with its G+ property, but the efforts have proved mostly a failure. Facebook (FB) has been just too tough a contender to go toe-to-toe with.
Yet, social media is a critical part of mobile: People like to share photos and videos of family and friends, serving to create lots of engagement and tremendous opportunities for monetization. The average FB user, for example, spends over 20 minutes per day on the service.
What’s more, based on research from eMarketer, FB controls about 65% of the $16 billion in U.S. social media ad spending and GOOG is in the “other” category.
In light of this, GOOGL really does need to find a way to get a footprint in the social media world. And perhaps the best way is for an acquisition, such as to make a play for Twitter (TWTR) or even Snapchat.
Google Stock Risk #2 — Messaging
Mobile messaging is another area where GOOGL is far behind.
No doubt, this is definitely a big-time problem since the monetization opportunities look enormous. As InvestorPlace’s own Brian Nichols recently pointed out, just some of the potential revenue streams for messaging apps — like WhatsApp — include: payments, targeted display and video ads, and perhaps even appstores. Actually, China’s WeChat has already been generating substantial revenues from these sources.
Unfortunately, it looks as if Google may completely miss out. Granted, the company has plans to improve its own messaging apps with artificial intelligence capabilities, according to the Wall Street Journal. But then again, Facebook is doing the same thing.
Google Stock Risk #3 — Antitrust
The good news is that GOOG is the dominant player in one of the world’s most lucrative markets — Internet search. But ironically, there’s bad news: The situation has raised the concerns of antitrust authorities in Europe and the U.S. There is even buzz that the Android operating system may also pose anticompetitive issues.
So far, it is tough to gauge the outcome. But it may not really matter. The fact is, antitrust investigations can be extremely distracting and expensive. This was the case with Microsoft (MSFT) during the 1990s, as well as IBM (IBM) and AT&T (T) during the 1970s.
In every one, there was a hit to the company.
Google Stock Risk #4 — Overstretch
It’s not going to be easy for Alphabet to keep up with its strong growth rate. Revenue base is already quite large, so the company really has no choice but to look beyond its core to find growth opportunities.
To this end, Alphabet has invested in far-flung areas like autonomous cars, Nest and even biotech. These are all part of the so-called “moonshot” plays.
While all this is exciting, there are definitely risks. First of all, there’s a good chance that none of the moonshot opportunities work. And this would likely weigh on Google stock.
But perhaps the biggest risk is managerial bandwidth: Can Alphabet manage disparate businesses and still maintain its focus?
So far, it’s too early to tell. But keep in mind that this has been a problem for many other former tech titans, such as Hewlett-Packard (HPQ) and Cisco (CSCO).
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
