Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is a stock that’s boring, until it’s not. In 2012, GOOG stock went up by single digits but then in 2013 it gained almost 60%. Then in 2014, what was then Google stock lost about 3% before gaining another 44% again in 2015 after changing its name to Alphabet along the way.
In 2016, Alphabet Inc. was up by about 8% to lag the overall stock market. So will the past trend hold, and will 2017 be a breakout year?
There are fair arguments on both sides. After all, the high-growth days of Google are behind it after the internet giant has matured to a nearly $600 billion company. Also, rival Facebook Inc (NASDAQ:FB) is now its peer in both its reach and its relationship with digital advertisers. On the other hand, bulls who like GOOG stock or GOOGL like its track record of consistent growth and innovation over the years.
So who’s right? Here’s a look at both sides of the trade with three pros and three cons to investing in Alphabet stock right now.
Pros of GOOG Stock
Growth: While the company restructured into Alphabet in 2015, Google advertising remains the biggest part of its business. And that business is good, judging by overall revenue growth of 19% this year and a projected 16% growth rate next year. Furthermore, profits will be up 16% this year and 19% next year. With continued success from its core, Alphabet can afford to look into new efforts without worrying about financial performance.
Valuation: Despite a strong history of success and projections of future growth, GOOG stock is not overvalued. Right now, shares trade for around 20 times forward earnings. That is on par with forward P/E of about 19 for the typical stock in both the S&P 500 and the Nasdaq 100. If you can get a fair price for a high-growth company like this, you should take it.
Innovation: With a fair current price and hopes of future growth, there’s a lot to like about Alphabet Inc. right now. But with constant innovation into new areas, including a “smart” contact lens that can read your blood sugar or Google Fiber high-speed internet access, there is a whole lot of future potential from GOOG stock.
Cons of GOOG Stock
Investors Still Waiting for Next Big Thing: In a 2016 research report, Bernstein’s Carlos Kirjner pointed out that Alphabet’s average return on invested capital “has declined steadily for the last 4-5 years” as the product pipeline has failed to yield the big success of past years. Yes, Alphabet is trying to innovate with things like self-driving cars … but Uber is standing toe-to-toe with it anyway. Yes, Google is pushing a subscription based YouTube Red… but it’s late to the game, behind Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) with its Prime Instant Video offerings. Investors waiting for the next big thing, then, may have to wait for some time.
Over-reliance on Google: While Google ad revenue is looking good right now, there is a big risk in parent Alphabet Inc relying on this unit for literally 99% of its revenue and 100% of its profits. When you take this over-reliance alongside the lack of “other bets” paying off and the declining return on invested capital, the future doesn’t look quite as rosy for GOOG stock.
Unrealistic Earnings Expectations: Perhaps most damningly in the short-term, the company posted very strong quarterly earnings back in October 2016. However, despite beating on both the top line and the bottom line, shares actually dropped 5% across the next 30 days even as the broader stock market went on a tear in November. As we approach another important earnings report, remember this performance because it could hint that investors are bidding up Alphabet Inc now but expecting to promptly sell it after the latest numbers hit Wall Street.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP.