Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is one of the most dearly beloved stocks on Wall Street. This remains true despite a paltry 4% gain for Google stock in 2016. Investors will forgive a company when its return over five years are over 150%, almost twice the gains of the S&P 500.
Many InvestorPlace writers love GOOGL. Chris Katje thinks its Wing Marketplace, a food delivery start-up, could soon stand on its own. Chris Tyler says you should buy Google stock for a breakout to the upside. Craig Adeyanju insists it leads the self-driving space and is well positioned. Ryan Fuhrmann says the boom story is not over.
But Alphabet is no longer politically favored. CEO Larry Page’s attendance at the Trump “tech summit” continues to anger the company’s allies. Tech companies have reason to fear Trump. GOOGL has $58 billion in cash overseas and the company is not on the President-elect’s Christmas card list.
GOOGL Priced to Perfection
When most smart people are predicting great things, it is always wise to consider a bear case. When everyone is in a stock, or any financial instrument, it makes a fall more likely.
Right now, Alphabet is priced to near-perfection — it has a price-to-earnings multiple of 29 — and it is anticipating a steady rise in profits. That looks baked-in for 2016, with $20.77 per share in net income already booked against last year’s $22.84. The balance sheet looks pristine and cash flow is accelerating, reaching over $26 billion just last quarter.
So far, so good … but Google is changing its alphabet.
The company’s past is based entirely on cloud software delivering advertising revenues. Google has spent 2016 preparing for a big push into hardware, with a new phone to go against the Apple Inc. (NASDAQ:AAPL) iPhone, a voice-activated assistant to go after Amazon.com, Inc.’s (NASDAQ:AMZN) Alexa, a VR headset to go against the Facebook Inc (NASDAQ:FB) Oculus, and a new router that will compete with carrier-delivered gear from Comcast Corporation (NASDAQ:CMCSA) and AT&T Inc. (NYSE:T).
There are two types of risk associated with this move. There is the market risk of going against other big companies. And there is political risk, because every move of the search engine will now be measured against what it means for its growing hardware ecosystem.
There is reason to believe Alphabet knows this. Google Fiber is being scaled back, and the auto business, now called Waymo, is being slowly transformed from a carmaker to a parts-and-software supplier.
Alphabet Can Lose
GOOGL is already facing political headwinds, especially in Europe, which has filed an antitrust case and is demanding global censorship of the internet resource, including erasing statements from people supportive of the new U.S. Administration.
Google was already under pressure on issues of privacy and the so-called “Right to be Forgotten,” designed to make negative statements on people more difficult to trace. Google is still being kept out of China as that country demands the same thing Europe does, obedience to local laws even when they conflict with American norms.
Bulls are expecting big things from Google stock in 2017, starting with $7.66 per share in earnings and $20 billion in revenue for the current quarter. For 2017, analysts are expecting $32.25 per share of GOOGL in earnings, which would still mean a forward price-to-earnings multiple of 25 at current prices.
Can Google Stock Meet Expectations?
I am not a Google stock bear, as you will see in the disclosure at the bottom of this story. But I do think the bulls are being a little too sanguine in the near-term, meaning over the next year or two. Expectations for the company are ignoring political and business risks that have been growing through 2016.
My guess is that at some point next year the bear case for GOOGL will be heard, and you’ll get a chance to get into Google stock for much less than you’re paying now. Alphabet will remain the dominant company of our age, but I lived in Houston during the 1970s, when resource companies dominated the economic skyline, and not every year was a great one, even then, in the oil patch. That industry had to grow, politically, into its economic position.
GOOGL now has enemies, powerful interests, which see it as evil. How it stands up to the pressure will tell a lot about how Google stock performs over the next few years. As was said in Citizen Kane, Citizen Kane is going to need more than one lesson. And he’s going to get more than one lesson.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in GOOGL, AAPL, AMZN and FB.
