Tech giant Alphabet Inc. (NASDAQ:GOOGL) saw its share price drop significantly alongside the greater market in the beginning of February, but since that time Alphabet stock has been back on the rise. While buying GOOGL at $1,143.70 isn’t quite as satisfying as snapping it up at a mere $1000 per share a few weeks ago, that doesn’t mean it’s still not a good buy.
There’s no disputing that Alphabet is one of the strongest tech firms out there, the company has seen investor confidence start to wane over the past year.
The company is facing a turning point in which its massive reach is starting to become an obstacle and investors worry that Alphabet stock won’t be able to deliver the triple digit gains that they’ve gotten accustomed to.
Here’s a look at the pros and cons to buying Alphabet stock.
Although Alphabet is most commonly known for Google, its search engine, its business is widely diversified and offers investors a lot more than meets the eye. The firm’s online platforms include everything from video content (YouTube) to email (Gmail) and a web browser (Chrome).
Then there’s the company’s widely successful Android operating system and Google Play app store- which is pretty much the only option outside of Apple Inc.’s (NASDAQ:AAPL) own store for smartphone users.
Additionally, the firm’s Cloud business has been growing rapidly over the past few years. Google has been focusing on growing its enterprise Cloud users, a move that has seen the business’ revenue climb beyond $1 billion for the first time last quarter.
One of the problems plaguing Google right now is the company’s size and reach when it comes to internet usage. The firm has been under fire in several countries because of concerns regarding privacy and competition. These kinds of problems come with the territory when you’re as large and as popular as Google is.
The trouble is that as regulators sniff around Alphabet’s business, changes may have to be made regarding the way that the firm displays search listings and runs its own “shopping” platform.
Those changes will inevitably hurt advertising revenue, not to mention the fact that the firm may have to pay hefty fines if regulators find that any laws have been broken.
On the flip side, Alphabet’s size is a huge reason to love the company as well. Google is far and away the most popular search engine on the internet, which means advertisers are willing to pay top dollar for ad space.
Not only that, but the fact that “googling” has become synonymous to searching suggests that people are comfortable with using Alphabet platforms- switching costs are high giving the firm a wide moat.
Not to mention that Alphabet already has a decade-long head start on video content. Companies like Facebook Inc. (NASDAQ:FB) are only just starting to build out competition for Google’s YouTube service- Alphabet already has the benefit of experience and time on its side.
While Alphabet stock once offered investors a share in a tech firm that was doing something no one else was, competition is getting stiff- even for Google whose size has made it an intimidating competitor.
Amazon.com Inc. (NASDAQ:AMZN) has emerged as a competitor for advertisers because people searching for products on Amazon are more likely to buy them than they are searching for them on Google. As I mentioned above, Facebook is also vying for some of Google’s ad space as well.
Then there’s the myriad of other companies that are also working on cloud computing offerings who stand to take away from Alphabet’s growing presence in that space.
Pro: Financial Strength
Another reason investors should feel secure in owning Alphabet stock is that the company offers a great deal of financial security. Business is going well for GOOGL- the number of paid clicks rose by 48% over the past year and the firm’s ad revenue came in a $27.2 billion.
Alphabet also has less than $4 billion in long-term debt and a healthy amount of cash on the balance sheet.
That kind of financials prowess is essential for a few reason. First- it gives the firm a buffer in the event of a catastrophe. However, barring an unforeseeable event, the cash gives Alphabet the ability to invest in its own future through R&D.
Not only that, but there’s also been chatter that Alphabet stock might eventually use some of that excess cash to return value to shareholders via a dividend payment.
Con: Reliance on Advertising
Another sticking point for investors has been the fact that Google’s business rests largely on the firm’s advertising revenue. Roughly 70% of the company’s overall revenue comes from advertising, so although it’s nice that GOOGL is branching out into Cloud computing, hardware and even driverless cars, right now the firm depends on ad dollars.
There are several reasons that is troubling. For one, there are a lot of other companies out there competing for those ad dollars. Then there’s the fact that Google has to cope with worries about inappropriate ads and ad placement on inappropriate YouTube videos.
The firm is also battling concerns about fake news. All of those worries could directly impact the company’s performance in a big way because they directly affect its core business.
The Bottom Line
There’s no such thing as an investment that doesn’t carry any risk, but I wouldn’t discount GOOGL as a risky bet. While the firm’s heavy reliance on ad dollars is certainly a concern, it’s reassuring to see Alphabet stretch its legs in the hardware and cloud computing space.
Both of those segments will likely grow to make up a larger proportion of the firm’s overall revenue in the decade to come, making Alphabet stock a good long-term bet.
As of this writing, Laura Hoy was long AMZN and FB.