3 Major Risks for the Future of Alphabet Inc (GOOGL) Stock

GOOGL stock - 3 Major Risks for the Future of Alphabet Inc (GOOGL) Stock

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On the heels of a $2.7 billion fine from the European Union, Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) stock has been wobbly lately, with shares off nearly 7% over the past week.

3 Major Risks for the Future of Alphabet Inc (GOOGL) Stock

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But this is kind of minor in light of the overall gain for the year. Note that — during this period — GOOGL stock is up about 19%.

Then again, the company continues to execute. In the latest quarter, revenue jumped by 22% to $24.75 billion and earnings came to $7.73 per share. The Street, on the other hand, was looking for the top line to come in at $24.22 billion and profit at $7.39 per share. Along with Facebook Inc (NASDAQ:FB), GOOGL is getting an outsized share of the digital ad opportunity.

It certainly helps that the company has a set of standout assets such as Search, Android, Maps, Chrome, YouTube, Google Play and Gmail. All have more than 1 billion users.

All of this is great, but there are still some nagging issues with GOOGL stock. While such factors do not necessarily imply that shares are vulnerable, it is still important to get a sense of the risk factors. So, let’s take a look at three of them:

Issue #1 for GOOGL Stock: Regulatory Scrutiny

Keep in mind that the $2.7 billion fine came as a bit of surprise for Wall Street. Note that it was actually the biggest levy in the history of the EU. In fact, this involved a seven-year investigation, which concluded that Alphabet had engaged in anticompetitive behavior.

At the heart of the case was Google Shopping. For the most part, the EU believes that the company unfairly used its massive dominance in Search to ding rivals.

No doubt, the fine does not seem particularly large, especially given Google’s enormous cash hoard. But, there are likely to be lasting consequences. First of all, GOOGL will probably have to meet onerous requirements for its commerce activities, which will weigh on revenue. Moreover, the company may take precautions with its various other properties to avoid more regulatory backlash.

Consider that the EU currently has two other antitrust investigations against GOOGL targeting AdSense and Android. Interestingly enough, the fines could be as much as 10% of the company’s annual revenue.

Additionally, other countries may be emboldened by this move. In other words, they could use their own regulatory frameworks to blunt Google’s power and allow their own home-grown digital properties to have more advantages.

Issue #2 for GOOGL Stock: Threats to the Ad Business

Much of the revenue for GOOGL still comes from the ad business. And, as InvestorPlace’s James Brumley pointed out in a recent post, there are multiple risks. One is actually Amazon.com, Inc. (NASDAQ:AMZN). Over the past few years, Amazon has been aggressively bolstering its ad network. AMZN certainly has some major advantages like its massive scale and access to tremendous purchase data on users, which could put pressure on GOOGL stock.

Next, publishers are trying to find ways to lessen the power of Alphabet. Often this is by teaming up in ventures and partnerships. A notable example is a group that includes International Business Machines Corp.’s (NYSE:IBM), Penske Media and New York Daily News.

And finally, FB could be poised to take more marketshare away from GOOGL. Let’s face it, the user growth has continued at a rapid pace. But, FB also has the advantage of deep demographic information, which allows for more targeted ads.

All this does not imply that somehow the Alphabet ad business is going to fall apart. But, if there is a deceleration over the next couple years, then there is likely to be an adverse impact on the GOOGL stock price.

Issue #3 for GOOGL Stock: Finding Growth

GOOGL is running into the proverbial “law of large numbers.” That is, with a revenue base of a staggering $90 billion, it will get increasingly harder to find new sources.

Again, the fierce competitive environment will be a major factor. But, at the same time, it is important to keep in mind that GOOGL has not really introduced must-have products lately. This is despite the substantial investments in moonshots.

Granted, innovation is far from predictable. But, if GOOGL wants to keep up its growth, the company must find ways to excite its creative juices.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About CommoditiesAll About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/07/3-major-risks-alphabet-inc-googl-stock/.

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