Alphabet Inc (NASDAQ:GOOG) is making headlines after Unilever plc (ADR) (NYSE:UL) has threatened to pull ads over fake news. But I think this is just a temporary setback for GOOG stock that will lead to higher long-term gains.
Ever since the 2016 Presidential Election highlighted the problem of digital misinformation, ‘fake news’ has quickly morphed into digital advertising giants’ biggest enemy.
Google was hit with major advertiser churn in early 2017 after it was discovered that ads from Verizon Communications Inc. (NYSE:VZ) and Walmart Inc (NYSE:WMT) were appearing next to extremist content.
Facebook, Google, and Twitter Inc (NYSE:TWTR) have all been called to testify in front of the Senate regarding fake news.
Even renowned comedian Jim Carrey jumped on the bandwagon, deleting his Facebook account and selling his Facebook stock.
Now, major advertisers are starting to threaten the digital advertising giants. Consumer goods giant recently Unilever recently threatened to stop spending on Google and Facebook ads if the two digital platforms don’t get their act together on the fake-news front. That is a big deal, because Unilever, the company behind brands like Dove and Axe, is the world’s second largest advertiser.
While these may seem like major headwinds for a company like GOOG, I really think this is just near-term noise. Long term, GOOG stock is a buy. Here’s why.
Google Will Turn Headwinds Into Tailwinds
When all is said and done, there is still this massive secular trend playing out where ad dollars are shifting en masse from traditional mediums to digital mediums. Why? Because digital advertising is more targeted. It reaches more people. There is more data. It’s on demand. Most importantly, digital advertising has higher ROI.
In other words, this shift isn’t going to all the sudden stop because of fake news. Due to higher ROI, greater convenience, and increased consumer connection to digital platforms, dollars will continue to shift en masse to the digital ad world.
When it comes to the digital ad world, there are no rivals or peers for GOOG and FB. The two are both unparalleled and unprecedented in terms of size and reach. Because of this, brands need them for exposure in the digital world.
From this perspective, recent threats from Unilever aren’t a sign of the end. Unilever doesn’t want to sever its relationship with GOOG and FB. Rather, the recent threats are calls to action. Unilever simply wants FB, GOOG and other digital advertising giants to more aggressively police and vet inappropriate content.
GOOG and FB will do this. Already, GOOG has announced intentions to hire a staff of 10,000 to vet extremist content on YouTube. Moreover, GOOG has found tremendous success with its Redirect Method, which sends anti-terror messages to people who are likely to seek out extremist content. All together, advanced algorithms plus human reviewers has led to GOOG taking down nearly 70% of extremist content within 8 hours of upload and nearly half within 2 hours.
GOOG will continue to address its fake-news problem head on. Brands like Unilever won’t cut their ad budgets. Instead, they will grow them because transparency within GOOG advertising will grow with more comprehensive vetting. All in all, GOOG wins.
Bottom Line on GOOG Stock
I think you should ignore all this fake-news stuff on the notion that GOOG will leverage its tremendous amount of resources to fix the problem.
Putting the fake-news headwind to the side, you are looking at a GOOG stock which trades at 25-times forward earnings for a long-term earnings growth rate of 25%. That is a price-to-earnings/growth (PEG) ratio of just 1, which looks incredibly cheap next to the market’s 1.2 PEG. If you give GOOG stock that market average PEG of 1.2, then you’re talking about a 30-times forward multiple and a stock around $1,275.
GOOG stock currently sits at $1,050. I like that set-up.
GOOG stock should head higher as this market rebounds from a sloppy sell-off and GOOG turns fake-news headwinds into long-term growth tailwinds.
As of this writing, Luke Lango was long FB, GOOG, SNAP, and VZ.