After a huge bull run to start the year, mega-cap tech stocks like Alphabet Inc (NASDAQ:GOOGL) suddenly have lost their momentum. GOOGL stock hit $1,000 for the first time in June, just a week after Amazon.com, Inc. (NASDAQ:AMZN) did the same. Since then, however, GOOGL, AMZN, and fellow “Fang stocks” Netflix, Inc. (NASDAQ:NFLX) and Facebook Inc (NASDAQ:FB) have weakened.
In the case of both AMZN and FB, the pullback looks like a buying opportunity. For GOOGL stock, however, I’m not so sure. There are real risks facing Alphabet Inc, as I argued back in May.
And the valuation assigned to GOOGL stock still looks a bit stretched. With GOOGL now trading some 6%-plus below that $1,000 mark, it may take months — at least — for GOOG stock to again trade in the four figures.
Regulators Target Alphabet Inc
Last month, Alphabet Inc was hit by a $2.7 billion fine by the European Commission. The EC alleges that Google gives search result preferences to its own shopping services. That, in turn, is a violation of European Union antitrust laws.
GOOGL stock fell nearly 3% on the news. And while InvestorPlace columnist Nicolas Chahine pointed out — accurately — that the amount is tiny relative to the overall value of GOOGL stock, I’m not sure investors should ignore the regulatory developments.
For one, it’s possible another fine is on the way, related to Google’s Android operating system. For those old enough to remember the endless battles between Microsoft Corporation (NASDAQ:MSFT) and European antitrust regulators, history shows that once regulators take one bite, they tend to take more.
Obviously, Alphabet Inc won’t be put out of business. But it could have a persistent legal headache — and have to change the operating model that’s made it so dominant worldwide.
Waymo’s Valuation Is Getting A Little Silly
The recent pullback in large-cap tech might be due, at least in part, to some healthy skepticism toward autonomous driving. Both Nvidia Corporation (NASDAQ:NVDA) and Tesla Inc (NASDAQ:TSLA) have pulled back sharply of late as well.
Ever-increasing valuations for Alphabet Inc unit Waymo no doubt have boosted GOOGL stock. And as our Brian Wu pointed out, the $70 billion valuation assigned by Morgan Stanley looks far too optimistic. Waymo already has stopped making its own cars, partnering instead with Fiat Chrysler Automobiles NV (NYSE:FCAU).
Given that development, the idea that Waymo can support over 10% of the market valuation of GOOGL stock seems likely simply too much. So does the argument that Waymo — now — is worth more than either Ford Motor Company (NYSE:F) or General Motors Company (NYSE:GM), let alone TSLA stock. Waymo, if indeed it takes market share, is a play for not the next decade, but the one after that. Buying GOOGL stock on that basis seems foolhardy at best.
GOOGL Stock Still Looks Stretched
Whether or not GOOGL stock is “cheap” largely is in the eye of the beholder. At something like 19-20x 2018 EPS plus cash, GOOGL stock does trade more cheaply than even FB stock, let alone AMZN or TSLA.
But bear in mind that Alphabet Inc isn’t growing anywhere near as fast as those peers. For all the hype about the company’s “Other Bets”– and I do think they have some real value — this remains an online advertising company at its core. But lower CPC (cost per click) rates remain a long-running issue. An international boycott of YouTube by corporate advertisers hasn’t been resolved quite yet.
It’s not hard to see the narrative surrounding GOOGL stock changing, and some of the old fears resurfacing. If that plays out — and if optimism toward Alphabet Inc “moonshots” diminishes at the same time — GOOGL stock won’t see $1,000 for quite a while. In fact, it may see $900, or worse, first.
As of this writing, Vince Martin has no positions in any securities mentioned.