Since briefly touching $1,000 per share early this summer, Alphabet Inc (NASDAQ:GOOGL), formerly known as Google, has found a world of hurt.
The June quarter, reported in late July, was a bad one. Net income of $3.524 billion ($5.01 per share) was way off the previous year’s $4.877 billion ($7 per share) figure. Investors had grown accustomed to 25% of revenue hitting the bottom line, but, for June, this was down to 15%.
For the September quarter, due to be reported Oct. 23, analysts are expecting profits of $8.38 per share on revenue of $21.96 billion. That would be stronger profits, on lower revenue, than last year.
But the raw numbers just hint at the problems with the company, which are best summed up on one word: malaise.
Google Shuffling Deck Chairs
The latest reorganization by Chief Financial Officer Ruth Porat has created a new holding company, called XXVI Holdings Inc. (there are 26 letters in the alphabet, get it?). Each of the company’s “other bets,” like the Waymo self-driving car group, are now separate units under the holding company, not lumped together.
But these moves are starting to look like rearranging deck chairs. None of the “other bets” are close to turning a profit. Google Fiber has completely stalled out, having laid fiber cables across part of Atlanta, but leaving them dark for over a year now. Even if the company tried to sell the unit, who would buy it, given that it’s an overbuild over existing networks from Comcast Corp. (NASDAQ:CMCSA) and AT&T Inc. (NYSE:T), who have also run fiber to the same areas?
There are bigger problems.
Google was late to selling cloud services and its infrastructure market share remains closer to that of International Business Machines Inc. (NYSE:IBM), which has 4%, than it does to Amazon.Com Inc. (NASDAQ:AMZN) Web Services, which has 47% of the infrastructure market. It’s Microsoft Corp. (NASDAQ:MSFT) that is catching up, now with 29% of the application workloads, versus 41% for AWS. Google Cloud has just 3%.
Google has tried to catch up by offering “developer credits” alongside Cloudflare and offering different “tiers” of network performance, a premium tier using Google’s own network and a standard tier similar to other clouds.
Google director Diane Greene, who runs the cloud unit, has publicized some wins, like Marketo, and a deal with Box Inc. (NYSE:BOX) involving machine learning, but Synergy Research Group still has them stuck in fourth place behind even IBM.
Cheese It, the Cops
The Trump Administration represents another worry. James Brumley writes that the Justice Department may be plotting a break-up of the company and even if it doesn’t happen, fighting it is certain to bring Google a host of lawyers whose job it will be to say no, just as happened to Microsoft a generation ago.
The last thing Alphabet needs right now is people saying no. The “other bets” may not have made money, but they created excitement. Porat has stamped that out, and the rest of the company is drifting. The search services and the YouTube video services still make a ton of money, the ad network is the most powerful force in advertising, but there are no other moats, and it’s not good to be the king when the peasants start revolting.
I sold my Alphabet investment when it crossed $1,000, and it’s now fighting to hold $940. It needs a bigger shakeup to win that fight, and I don’t know where the new inspiration is coming from.
Chris Fraley writes the stock looks good from a technical perspective, having now touched its 50-day moving average. A strong third quarter report could indeed lead to a break-out.
But I’m not betting on it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
