Alphabet Inc’s (NASDAQ:GOOGL) stock has certainly been solid this year. But on the other hand, the performance has lagged many other of the megatechs. Keep in mind that Facebook Inc (NASDAQ:FB) is up 52%, Apple Inc. (NASDAQ:AAPL) has gained 48% and Amazon.com, Inc. (NASDAQ:AMZN) has returned 55%. By comparison, the GOOGL stock price has increased by 29%.
In fact, this is in-line with the performance of Twitter Inc (NYSE:TWTR)! So what is going on here? And might there be a relative value opportunity with GOOGL? Well, first of all, there are definitely worrisome risk factors. Just look at the growing regulatory uncertainty.
GOOGL has been under scrutiny for the trend of “fake news.” Of course, this is a threat for other social networking operators like FB and TWTR. Given the enormous power of the industry, it would not be surprising that the U.S. government will eventually impose restrictions.
After all, the traditional media business has had to deal with this for decades. But there is something else that could pose a big problem for GOOGL stock, the company’s business practices.
For example, the EU (European Union) recently imposed a $2.7 billion fine against the company for anticompetitive actions with its ecommerce properties. This was the biggest one in its history. Going forward, the company will likely have to tone down its approach to certain markets, which could weigh on revenues.
Note that there are many examples of this through tech history, as seen with the aftermath of governmental actions against companies like Microsoft Corporation (NASDAQ:MSFT), AT&T Inc. (NYSE:T) and International Business Machines Corp. (NYSE:IBM).
OK, so is this enough to just say “no” to GOOGL stock? Not necessarily. Regulatory actions take time to have an effect. And the good news for Alphabet is that there are major tailwinds that should help propel GOOGL stock.
A Closer Look at GOOGL Stock
YouTube: It’s hard to be believe that GOOGL bought this property for a mere $1.65 billion in 2006. But according to Aegis Capital’s Victor Anthony, it is now worth at least $75 billion! Yet he may be underestimating the value.
Keep in mind that YouTube has over 1.5 billion users, who spend 60 minutes a day on the app. Oh, and over 100 million hours are spent in the living room every day, up 70% on a year-over-year basis. Going forward, YouTube plans to improve the monetization, such as with subscriptions and original programming.
Google Cloud: This often gets overlooked, but it shouldn’t. The cloud business is a powerhouse. It’s important to keep in mind that the platform has the kinds of things that enterprises want, such as deep security, access to productivity apps and the provision for hybrid environments.
As a testament to this, GOOGL has been able to strike major strategic alliances with companies like Cisco Systems, Inc. (NASDAQ:CSCO).
AI (Artificial Intelligence): GOOGL has the advantage of a multiple of massive web properties, which allows for experimenting with AI. Already the technology has boosted search, Photos, Maps, and the Assistant offering.
But GOOGL has been smart to create an open source AI platform, called TensorFlow. It has quickly become a standard and is the underlying system for devices of more than 1,000 brands. What’s more, AI will be critical for many megatrends like Augmented Reality, Virtual Realty and the Internet-of-Things.
Bottom Line on the GOOGL Stock Price
For the most part, it seems that the issues for GOOGL stock have been backed into the valuation. Consider that the forward price-to-earnings multiple is at a reasonable 24X. After all, the company is expected to grow at a robust rate for some time and the cash flows will likely continue to gush.
What’s more, GOOGL has a history of dealing with headwinds and finding ways to prevail. And yes, management has a good understanding of the major tech trends and how to capitalize on them.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.