With shares of Alphabet Inc (NASDAQ:GOOGL) looking to cross the $1,000 threshold for the third time this year, anyone worrying about the company’s future would seem like a scold. GOOGL stock is up more than 25% in 2017 against a 22% rise in the NASDAQ.
What’s not to like about a company with a $687 billion market cap, up more than 1,700% from its 2004 initial public offering?
Well, let’s start with declining profit margins,as just 13% of last quarter’s $16 billion in revenue made it to the net income line, a steep drop from the 20%-plus that investors had become accustomed to. Analysts are expecting a turnaround for the third quarter, due to be released Oct. 26, but the whispers of $8.30 per share in net income are below the consensus estimate of $8.40.
There is trouble in Google-land.
Sundar Pichai is a Nice Fellow
Google CEO Sundar Pichai is charge of delivering those earnings. The native of Chennai, India is a living embodiment of the American dream, having come to the U.S. for a year’s study of metallurgy at Stanford in 1993. He is portrayed as the father of Google’s Chrome browser, which now dominates the market, and a respected engineering manager who believes in small teams over brute force solutions.
Pichai has shifted Google’s focus from “mobile first” to “Artificial Intelligence (AI) first,” which is why the company is investing so heavily in hardware, copying the Amazon.com Inc. (NASDAQ:AMZN) Echo line with speakers, PCs that compete with Microsoft Corporation (NASDAQ:MSFT) and phones to compete with Apple Inc. (NASDAQ:AAPL), all with a built-in voice interface.
This is not innovation. It’s me-tooism. Google’s even launching pop-up retail stores and giving the stores space on its once-pristine home page.
Having won a dominant market share in phones by enabling other manufacturing names to deliver its free Android operating system to consumers, Google now finds itself hawking its own brand in crowded markets, not an easy win by any means.
Media Assets Drifting
Meanwhile, the goose laying these golden eggs continues to drift.
Pichai’s approach is to speak softly and take a long-term approach, acknowledging the critics and negotiating adjustments rather than proclaiming that it’s “not evil” and taking a stand.This is fine for things like YouTube and the search engine, but it has left anything even resembling media to languish, like Google News, now almost 15 years old but still ad-free and just as likely to feed users opinion pieces and propaganda as real news stories.
Pichai claims to “feel the pain” when linking to false stories, but his approach remains an engineering one. The company is paying publishers to help with Stamp, a multimedia slide format geared to mobile phones. It has dropped its demand that publishers not hit its users with paywalls on their first link, taking the critical hit from them.
It’s all retreat, mollify, and engineer. Facebook Inc (NASDAQ:FB) has hired journalist Campbell Brown to develop something like a “media policy.” There is no such figure at Alphabet.
The Bottom Line for GOOGL Stock
Alphabet is drifting onto the media rocks, trying to engineer around Google’s problems of public perception rather than confronting them, and focusing on hardware projects that are certain to hit its margins.
Buying Alphabet stock rather than the NASDAQ average is no longer a sure bet. When the average rolls over — and increasingly analysts see a tech top on the horizon — Alphabet is likely to roll over with it. The first time the stock broached $1,000 this year, I got out. It was the right call then and it is the right call now.
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, AMZN and FB.
