Alphabet Inc (GOOG, GOOGL), the undisputed king of the world wide web, may be starting to become a victim of its own success. After conquering the world, where else can it go?
That’s a question being closely monitored by the markets. If things don’t turn around quickly for GOOGL stock, it’s staring at a 3% loss for the second quarter or worse. This isn’t the follow-up Alphabet needed to a recent earnings miss that broke a three-win streak.
Can the king regain the throne?
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The key here is the context of Alphabet’s nearer-term troubles. Earnings results for GOOGL stock in Q1 of fiscal year 2016 weren’t bad by any means.
According to InvestorPlace contributor James Brumley, “Alphabet earned $7.50 per share on $16.47 billion in revenue.” Year-over-year, this translates into a 16% gain on earnings per share, and a 17% improvement on revenue.
As Brumley points out, there are a slew of companies that will take double-digit growth in any income category. However, GOOG failed to meet Wall Street’s lofty expectations and paid a big price in the markets shortly thereafter.
Only a Small Bump in the Road for GOOGL Stock
Of course, the company is by no means taking this lying down. On Wednesday, Alphabet launched Google Express — a delivery service-matching retailers to customers — in the Houston market.
GOOGL is eager to expand this venture, with additional markets in Texas and Oklahoma on their sights. While it won’t wrest control of the e-commerce sector from Amazon.com, Inc. (AMZN) overnight, it’s a signal of intent by GOOG that they’re willing to wade in to contested territory.
This is especially relevant considering Amazon’s “Echo” project, a digitalized personal assistant that is powered through artificial intelligence technologies. While artificial intelligence tech seems to be more Google’s fare, AMZN is coming to market first.
Despite claims from GOOGL management that the impact of such an advantage is often exaggerated, it’s not unreasonable to speculate that they feel threatened. The recent high profile hiring of Sam Schillace — former senior vice president of engineering for Box Inc (BOX) — to drive improvements in their cloud computing division reflects this unease.
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The markets might be reacting to those concerns. GOOGL stock has failed to impress, trending sideways to a year-to-date performance down 4%.
Worrisome for investors is the inability to break past upper resistance at the psychological $800 level. However, it may be premature to call GOOGL a bust.
Historically, Alphabet has trended in a step-wise pattern in the markets. This is characterized by a strong uptrend, followed by a relatively lengthy sideways consolidation. Also, the price action for GOOGL is still inside a bullish trend channel. Only if it breaks below support would a red flag be raised.
Further, the inability of GOOGL stock to get anything going in the last two months doesn’t necessarily spell disaster. In fact, this would be the third consecutive time in Q2 that the stock has fallen against the prior quarter. And from 2010 to 2012, GOOG has gone negative in the markets in Q2. Yet, only one time did Alphabet go underwater for the year, back in 2014.
Those that are overly pessimistic on GOOGL stock may also be failing to account for the company’s utter dominance in the online advertising market. Combined with Facebook Inc (FB), the two internet titans control more than 75% of this lucrative area.
Better yet, business continues to grow. Even though the profitability margin per advertisement has fallen, the total number of advertisements has risen substantially. This is primarily due to the rapid expansion of smart devices, which typically feature greater user engagement.
In other words, GOOGL isn’t going anywhere.
Sure, some investors may no longer feel comfortable with the company’s premium valuation, and they’ve gotten out at an ideal time. But fundamentally, Alphabet has a very strong business.
They’re also aggressively expanding into other markets, helping to ensure that they’re not too levered on any one area. Until we see compelling evidence to the contrary, GOOGL stock is merely taking an extended break.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
