We are very near the end of the current stock market rally. This — and not Alphabet Inc’s (NASDAQ:GOOGL) business model — is the problem with GOOGL stock today.
All the signs are there. People are driving faster, rushing for the last dollar. Money is being thrown at the market, heedless of risk. More important, it is being thrown at what has worked during this recovery, and those values are rising parabolically.
I’ve seen this movie before. I saw it with oil in 1980, with leveraged buyout companies in the late 1980s, with Internet stocks in the 1990s and with real estate during the last decade. Parabolic moves upward are followed by panicky moves down, like a tornado that lifts a house to the sky, then drops it.
At more than $1,000 per share, investors are paying over 32 times earnings for GOOGL stock. Even if Alphabet could maintain its 20% growth rate indefinitely, it would take 20 years to earn that investment back.
Google’s power and growth rate are simply unsustainable. The $9 billion fine being threatened by the European Union would represent 10% of its 2016 revenues. It is regularly accused of evil intent, even when it does things — like blocking annoying ads — that are unquestionably good.
Welcome to Silly Season
Even analysts who regularly pound the table for the stock, like our Bret Kenwell, are starting to have second thoughts.
Kenwell believes Alphabet’s Waymo self-driving car unit alone could be worth $70 billion. I find that hard to fathom in a world where General Motors Company (NYSE:GM) is fighting to hold $50 billion, and one in which Waymo has said it doesn’t know how to mass-produce motor cars.
Even taking that out, he still comes up with a price that’s “foamy.”
While Alphabet has a lot of fingers in interesting pies, it has yet to prove it can capitalize on any of them. Google Home is trailing Amazon.com, Inc. (NASDAQ:AMZN) Echo badly when it comes to home automation, despite a long head start. The same is true with many other products and services, like Google Shopping, its virtual reality efforts and cloud services.
Something seems to happen at GOOGL between the time a new product is cool, and when it’s accepted by the mass market. Either Alphabet gets market share and no profits, or no market share.
Outside the key areas of search and digital advertising, it doesn’t execute well against competitors.
What Could Happen to GOOGL Stock
Most of the trouble with Alphabet stock here is, as Kenwell says, technical. It is far above its moving averages, whether measured by the quarter or the year, but wildly overbought by several readings.
But some of the problems are fundamental.
In seeking to find readers content they can access, and not annoy them with content behind paywalls, it angers powerful paywall owners. Google, along with Facebook Inc (NASDAQ:FB), has destroyed journalism’s business model, which involves collecting premium audiences and charging premium rates to reach them. Neither has taken responsibility for the consequences.
A day of reckoning is approaching, in other words. And Google has nothing with which to take up the slack. Turning the hazards of Internet use into a game may sound awesome, but it doesn’t solve the problem.
Governance Costs Money
Right now, 35 of the 44 analysts following GOOGL stock still have it rated as a buy, although they expect it to fall slightly short of the year-ago period’s $8.42. Meanwhile, expectations for $25.6 billion in revenues still represents 19% growth … good, but the trend is starting to slow.
Why are analysts pounding the table for Alphabet? Because most analysts are in the business of selling stock, and nothing else in this market is working.
Google is going to have to spend billions of dollars over the next few years dealing with Internet governance problems of its own making. It can’t grow 20% in that environment, meaning it can’t justify its current valuation.
If you have a five- or 10-year time horizon, you can wait for Alphabet to deliver on its current promises. But you’re better off waiting for the market to realize this for you, and bring GOOGL stock down to a reasonable level. For me that’s 25 times earnings, about $800 per share and when the panic sets in, I expect it to overshoot that.
If you read disclosures carefully, I sold my Google shares yesterday.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.
