Advertising and search behemoth Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) has been a tech must-have for the past few years and for good reason: GOOGL stock owners have enjoyed hefty returns from a well-established, solid company that was still growing rapidly.
However, recent coverage on the stock has many questioning whether or not GOOGL will be able to continue delivering in the months ahead and if the firm should even be compared to the likes of Facebook Inc (NASDAQ:FB) or Netflix, Inc. (NASDAQ:NFLX).
Choppy Waters Ahead
The bread and butter of GOOGL’s business has been advertising and Alphabet has been top dog in this space for the past decade. However, the firm is facing stiff competition from companies like Facebook, Amazon.com, Inc. (NASDAQ:AMZN) and Oath, a new company formed by Yahoo and AOL.
Oath is approaching the advertising space with an eye on creating relationships between consumers and brands, to revolutionize the way we think about digital advertising. The thing about this approach is that if it’s successful, it would be very valuable to consumers. It’s also worth noting that AOL already owns a lot of its own content, so advertisers will be able to connect with consumers in a more meaningful way than they would on Google’s platform, where Alphabet doesn’t own any of the publishers’ content.
Google is also likely to lose a few advertising dollars to AMZN because the e-commerce site is better able to convert advertisements into sales. People go to Amazon because they’re ready to buy, so advertisements for whatever they’re looking for are generally successful in converting clicks to sales. However, Google is often used at an earlier point in the buying process and it’s a bit more hit-and-miss because consumers may just be doing some research but are not quite ready to pull the trigger when they come across an advertisement.
What’s more is that GOOGL doesn’t have much room to grow its advertising business. The company’s mobile search and YouTube platform have been responsible for a great deal of GOOGL stock’s growth over the past two years, but the two are nearing saturation. Instead, Alphabet may have to focus on playing defense rather than expanding its advertising business, something that is likely to weigh on the stock.
EU Fines Are Latest Trouble
Another question mark for GOOGL stock is whether or not its latest legal trouble will impact the firm in the long-run. Last week Alphabet was ordered to pay $2.7 billion in fines because of accusations that the company was manipulating search results to benefit its own business over outside companies.
Here’s the thing, as InvestorPlace contributor Nicolas Chahine pointed out: the fine isn’t going to make any significant dent in Alphabet’s business. Still, the fine does open the door to the possibility that GOOGL may be facing further legal action in its future.
Alphabet, along with several other U.S. tech firms, is in the sights of European regulators. Google has already had to deal with new laws allowing European citizens “the right to be forgotten” and now its shopping search has been challenged. This isn’t the first time Google has been in hot water for the way it runs its business and it’s likely not the last.
The Case For GOOGL
The fact is, GOOGL stock isn’t a terrible buy; it’s just that the company isn’t in the same hyper-growth stage as the rest of the FANG stocks. Alphabet is a solid business with many years of success under its belt — it’s been able to improve its top- and bottom- lines every year for the past decade, for crying out loud.
However, investors should keep in mind that all good things come to an end, and GOOGL’s ability to beat the market may be one of those good things. If you’re planning to add a FANG stock to your portfolio, Facebook might be the better pick. The company also has a solid foundation, but FB’s growth potential dwarfs GOOGL’s, making it a better choice.
As of this writing, Laura Hoy was long FB, NFLX and AMZN.
