Alphabet Inc (GOOGL, GOOG) stock is one of the most compelling investments in the entire stock market. Since it debuted in 2004, shares have been absolutely crushing the market. Over the last year, things are no different: GOOG stock is up nearly 34% while the S&P 500 is down 3%.
Now vying with Apple Inc. (AAPL) for the title of “most valuable company in the world,” Alphabet is one of the most widely held investments in the stock market today.
As such, it’s only fair that GOOG stock owners get to ask some tough questions.
While analysts do this on every quarterly conference call, sitting down and writing out some of the bigger questions facing Alphabet today is somewhat more thorough — and thankfully, that’s precisely what Bernstein’s Carlos Kirjner and team have done this morning, listing a number of tough questions for Alphabet CFO Ruth Porat.
GOOG Stock: YouTube, AI, Cloud, & the Future of Search
As you know, Alphabet is a veritable cornucopia of assorted brands and businesses.
One of the reasons GOOG stock has performed so nicely over the last year is due to its reorganization into a holding company called Alphabet last summer, which gave investors greater insight into the performance of the core search business — finally a separate entity from its litany of harebrained moonshots and “Other Bets.”
That doesn’t change the fact that a bet on GOOG stock is fundamentally still a bet on search advertising, so let’s kick it off with some questions from Bernstein about Alphabet’s bread-and-butter: Google.
GOOG Question No. 1: Are you hurting the Google search experience with more mobile ads?
Kirjner and his team are concerned that when GOOG decided to add an additional advertising link to the mobile search response page roughly a year ago, user experience took a hit. Organic results were pushed “below the fold,” meaning users have to scroll on their smartphones to see the organic results they were looking for.
The core question, “Why compromise user experience now to increase monetization?” is worth mulling over. After all, Facebook Inc (FB) has prioritized, time and time again, user experience over monetization, and the results have been pretty good.
GOOG Question No. 2: What will knowledge and search delivery look like in five years?
Kirjner expands:
For example, what will be the role for new user interfaces such as Amazon’s Alexa and voice input-and-output in general? In a voice-centric world, where queries, answers, and many notifications are all or mostly through voice, how is search or knowledge delivery monetized?
This is a great question, despite the fact that it may fundamentally be unknowable. But the fact of the matter is Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT), Facebook and Apple each have personal assistants, artificial intelligence software or voice search features that could erode Google’s market share over time.
GOOG stock owners shouldn’t forget that.
GOOG Question No. 3: So, artificial intelligence, huh?
Bernstein phrased this a little more elegantly, but the core question remains: What’s the scope of AI, where’s it going and what role is Google’s DeepMind playing in this?
This may sound like a far-off fantasyland for GOOG stock owners, but Kirjner reminds us that some people think strong artificial intelligence could be the “greatest human invention ever,” so keeping tabs on this is important going forward.
Especially the ethics part, which Google is doing a far-from-stellar job at navigating. The DeepMind Ethics Committee is an entity with anonymous committee members discussing undisclosed questions. Especially after New Scientist discovered that DeepMind has gained access to the health information of millions of U.K. citizens without their permission or any regulatory oversight, something needs to change here.
If it doesn’t, GOOG stock owners could have another large lawsuit from Europe on their hands.
GOOG Question #4: Are YouTube’s Growth Prospects Diminishing?
The following question is one of Kirjner’s most trenchant:
“Why is it that 10 years after the acquisition of YouTube and several years after Google’s initial efforts to monetize YouTube, only a small portion of the global video advertising budget has migrated to YouTube?”
Is this a function of the music-centric nature of YouTube’s content? Or the fact that much of it is short-form? While Kirjner estimates YouTube will haul in gross revenues of $15 billion in 2017 — roughly the same as CBS Corporation (CBS) and Viacom, Inc. (VIA) — Facebook’s video programming is heating up, and Amazon just launched a YouTube competitor as well.
Can GOOG stock count on YouTube as a long-term growth opportunity or not?
GOOG Question #5: Why not compete against eBay and Amazon? Can Google keep up with AWS?
Okay, so this is basically two questions. They’re both of notable interest to GOOG stock owners though, so I thought it was important to acknowledge them.
Kirjner wants to know: Is there “significant net upside for Google to make Google Shopping a marketplace through the deployment of a buy button across all listings? How would current advertising partners react?”
Obviously the second question doesn’t matter if the answer to the first question is “no,” but it’s an interesting thought. I can definitely see Alphabet CFO Ruth Porat being asked by a GOOG stock analyst if the company can become an eBay Inc (EBAY) killer sometime soon.
Then there’s the Amazon Web Services question, which Wall Street has largely answered already. A huge part of AMZN stock’s amazing run recently has been due to the meteoric growth and profitability of AWS, whose only remote competitor is Microsoft Azure.
While it’d be nice to see Google’s Cloud Platform catch up with AWS, Kirjner’s question is a little more specific, wondering whether GOOG would be willing to heavily invest in R&D to boost its cloud services and catch up with Amazon, which is itself pouring money into R&D.
Reading between the lines here, few people actually think Google can catch up to AWS anytime soon.
GOOG Stock: Answers Are Coming
Right now, these are just questions. But knowing the right questions to ask is half the battle, and Kirjner remarks that he put out this note because he’s been getting questions from investors about what they should ask Alphabet’s CFO if given the opportunity — a phenomenon, he says, that frequently occurs just before companies go on investor roadshows.
So maybe Alphabet will shed some light on some of these questions soon, now that they’re floating around Wall Street. While some of them may seem somewhat critical, it’s important to remember that when it’s all said and done, Bernstein is quite bullish on GOOG stock. Kirjner has a price target of $900 for GOOG, a premium of 26% to the $717 it traded at late Monday
Even if no answer comes this week, you can bet your bottom dollar some of these questions will be asked directly during Alphabet’s next earnings conference call.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
