The decision by managers at Yahoo! Inc. (NASDAQ:YHOO), in 1997, to listen to Wall Street and become “more than a search engine” will go down in history as the biggest mistake in the history of American business. Bigger than the Red Sox selling Babe Ruth. Bigger than Western Union ignoring the telephone. Today, 20 years later, the company that focused on what computers do rather than people has more opportunity than it knows what to do with. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), the artists formerly known as Google, will report first-quarter earnings on April 27 and analysts are expecting a hiccup.
The consensus on GOOGL stock is for net income of $7.24 per share on revenues of $19.31 billion.
The top line for Alphabet will fall almost $1 billion short of last year’s figure, but the bottom line will be almost 20% richer, with more than $1 in every $4 coming down to the net income line. Yet that’s a down quarter.
GOOGL Stock: The Downside of Self Service
The key to Alphabet’s success is self-service. You don’t talk to GOOGL before buying their search service, you just type (or talk). You don’t talk to Alphabet before buying their advertising, you just buy it online. Clouds scale to infinity and beyond, and with its niche secure, the company is a money-making machine you can’t turn off.
Like a trust fund baby, everything GOOGL touches turns to gold. Making certain it doesn’t color too far out of the lines is its “evil” stepmother, chief financial officer Ruth Porat, who cut off the company’s allowance for things like the self-driving car, and demanded such “side bets” be revealed to shareholders so they might pay their own way. I like Wall Street’s evil stepmother, very much.
There is a downside to all this. Alphabet treats its algorithms like an oil well that can’t run dry. Gender discrimination can creep into the company without its even knowing it. Ads may appear where they shouldn’t. I warned about this last month but until an algorithm is written to address it effectively, it won’t be dealt with.
Then, when you think the company is running into trouble, a new bright, shiny object will appear to make the trouble magically go away. In the world of GOOGL stock, there are many such objects.
Many Shiny Objects for Alphabet
Voice is a shiny object, and GOOGL is working hard to monetize it. Virtual reality is a shiny object, and Alphabet is working to make it mass market. By automating the production of “Pinterest” image boards, even Google Images can be turned into a money machine.
Some 90% of the world’s smartphones run Google’s Android, not Apple Inc. (NASDAQ:AAPL) iOS. Google Chromebooks now outsell the Macintosh PC and are responsible for what growth there is in that sector. The cloud itself is a shiny object, and just by putting someone with a clue in charge of it, GOOGL stock is worrying its “friends” at Amazon.com, Inc. (NASDAQ:AMZN).
The Bottom Line on GOOGL Stock
While Alphabet shares are up just 6% year-to-date and 9% over the last year, the market’s worries have made them into a bargain. The non-voting GOOG shares now have a price-to-earnings ratio of 28.6, which is lower than Microsoft Corporation (NASDAQ:MSFT), lower than Facebook Inc (NASDAQ:FB) and less than half that of Restaurant Brands International Inc (NYSE:QSR), which owns Burger King.
As much as I may worry about the company, owning GOOGL stock is the easiest hold in the history of Earth. Without even paying attention to it, my Alphabet shares have become the best-performing piece of my portfolio. Self-service is not going to disappear, and before things get too bad on any front the people at Google will wake up long enough to address them.
GOOGL stock is easy money.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in GOOGL, AMZN, AAPL, MSFT, QSR and FB.