I truthfully haven’t been a fan of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) stock for some time. And so far, the market has strongly disagreed. GOOGL stock trades near an all-time high, and up over 20% year-to-date, as Alphabet continues to grow revenue and earnings. Increased optimism toward the company’s “Other Bets” and shared dominance of online advertising with Facebook Inc (NASDAQ:FB) both are driving GOOGL stock toward $1,000 for the first time.
I’m still not ready to turn bullish on GOOGL stock just yet. I still see a number of risks not yet baked into the share price. Alphabet has had a few missteps of late, notably in its YouTube unit. Success in the company’s “moonshot” initiatives is far from guaranteed. And I can’t help but think investors are being a bit too sanguine — even if I’ve been wrong so far.
Alphabet Inc Has a Heavy Reliance on Advertising
Despite the coverage of Google Home, self-driving car project Waymo, and other projects, at its heart Alphabet Inc remains an advertising company. 88% of 2016 revenue came from advertising, per the 10-K.
For now, that’s probably a positive for GOOGL stock. Google and Facebook created 99% of U.S. online advertising growth last year. The rest of the online ad industry is dominated by concerns about click fraud and other abuse. It seems likely that the two giants will maintain, and likely grow, their market share.
But Alphabet Inc has had some problems in that area as well. Many international advertisers pulled their advertising from YouTube amid concerns about what content they were sponsoring. GOOGL stock has shrugged those worries off — but many haven’t returned. That problem still seems like it could allow Facebook to take additional share — a positive for FB stock, but a potential negative for GOOGL stock.
Meanwhile, the transition to mobile continues to impact both margins and revenue: cost-per-click rates for Alphabet Inc continue to decline, and acquisition costs rose in Q1. Admittedly, it’s not as if Google’s advertising business is going to collapse. But if it slows, about a 30x EPS multiple may have to come down — and so will GOOGL stock.
Questionable Other Bets
Outside of advertising, where is Alphabet Inc really dominant? Its Android ecosystem has established a nice duopoly with Apple Inc. (NASDAQ:AAPL). But the profits there — again — still are largely advertising-driven.
In terms of market share, Google Home is behind the Echo from Amazon.com, Inc. (NASDAQ:AMZN). In self-driving cars, Waymo has a shot. But it’s competing with everyone from Apple to Tesla Inc (NASDAQ:TSLA) to Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) — among many others. The sheer amount of data from Google Maps probably means Alphabet Inc has a presence in autonomous driving somehow. But its role may not be nearly as large as some GOOGL stock bulls suggest.
And there have been outright disappointments. Google Fiber appears on its way out. ‘Smart’ thermostat Nest hasn’t lived up to expectations. That’s not a bad thing or even surprising — Amazon has a long list of failures itself — but I’m not sure Alphabet Inc has a major winner outside of advertising. Its capabilities in AI, virtual reality and other categories are impressive. But how exactly GOOGL stock makes money beyond advertising remains to be seen.
GOOGL Stock Valuation Could Be Stretched
In a market where large-cap tech has been ‘hot’, GOOGL stock actually has underperformed. Of the so-called FANG stocks (Facebook, Amazon, Netflix, Inc. (NASDAQ:NFLX), and Google), GOOGL has had the weakest year to date. Of course, a 20% gain — and an extra $100 billion-plus in market capitalization — is nothing to sneeze at.
But I do think Facebook and Amazon, in particular, are better buys. Their dominance is in growing areas: Google’s legacy online advertising business is likely to slow at some point in the not-too-distant future. With GOOGL valued relatively similar to FB, in particular, in terms of earnings multiples, I’d rather have FB stock. And with concerns about market valuation as a whole increasing in size and volume, GOOGL stock could be a victim if the current optimism toward large-cap tech pulls back.
To be sure, Alphabet Inc is a great company, and a Silicon Valley titan. But a great company isn’t always a great stock — and even a good stock isn’t always the best stock. GOOGL stock surely isn’t a short — but investors expecting a smooth ride to $1,000 and beyond need to be careful.
As of this writing, Vince Martin had no positions in any securities mentioned.
