Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) stock hasn’t proven immune from a more volatile market. Alphabet stock actually has dropped a little over 4% so far this year. In just the last two months Google stock has swung from almost $1,200 to $1,000 — twice.
There is a case for Alphabet stock at these levels. The $1,000 mark has held as support on three different occasions. GOOGL now trades at just 21x 2019 EPS estimates — and closer to about 18x backing out the company’s cash hoard. It’s still dominant in online advertising, along with Facebook, Inc. (NASDAQ:FB). And its reach now extends beyond advertising to self-driving cars, hardware, and other areas.
But of late it seems like pressure is mounting on Alphabet stock. The data scandal at Facebook is reminding consumers of just how much information Silicon Valley titans collect. Nvidia Corporation (NASDAQ:NVDA) has suspended tests of its self-driving cars after a fatal Uber crash in Arizona, and Alphabet’s Waymo unit may do the same — or see the pace of adoption slow amid safety concerns.
Adding to that pressure is a legal decision in a long-running copyright battle with Oracle Corporation (NYSE:ORCL). Alphabet’s Google unit could be on the hook for billions in damages. On its own, the suit doesn’t break the case for Alphabet stock. But combined with the other headwinds facing Google stock, it’s enough to advise patience, at least.
What Oracle’s Win Means for Alphabet Stock
In a long-running case — first filed in 2010 — Oracle contends that Google violated its copyright related to its Java software in developing its Android software. Developers can use that software for free for certain applications — to a point.
Google won at jury, but the verdict was reversed this week by the U.S. Court of Appeals. And that sets up a potentially large damage award. Oracle is asking for $8.8 billion, at least. It could also affect further development of Android, either raising costs and/or, in a worst case scenario, opening the door for further market share gains by Apple Inc. (NASDAQ:AAPL).
On its own, the Oracle case doesn’t notably change the case for Alphabet stock. Even a $10 billion award would represent less than 1.5% of Alphabet’s total market capitalization. The case still has more twists and turns left, and could potentially go to the Supreme Court.
It’s worth noting that Oracle previously set the record for largest copyright award ever, winning $1.3 billion from SAP SE (ADR) (NYSE:SAP) back in 2010. That case finally was settled for $359 million — barely a quarter of that liability.
Challenges Facing Alphabet Stock
Still, the Oracle case adds to the sense that Alphabet seems somewhat besieged at this point. It had to settle a major case with Uber over trade secrets. It’s fighting with Oracle. Regulators in the U.S. are looking closely at the company. It’s already been fined $2.7 billion by the European Union, with the possibility of further action on the Continent.
Everyone seems to be taking aim at Alphabet at the moment. Microsoft Corporation (NASDAQ:MSFT) appears to be taking market share with its Bing search engine, at least according to that company’s commentary. Amazon.com, Inc. (NASDAQ:AMZN) is challenging YouTube, with that platform already facing an advertiser boycott.
And while none of the challenges, including the Oracle case, on their own notably affect the fair value of Alphabet stock, there’s increasingly a risk of “a death by a thousand cuts” scenario — or at least serious injury.
Don’t Short Alphabet Stock
To be fair, investors shouldn’t necessarily overreact to the issues facing GOOGL. There’s a reason Alphabet is such a target — and that’s because of its enormous margins and dominance in advertising.
Certainly, there’s a case that Google stock has priced in its issues — and then some. A sub-20x earnings multiple doesn’t require much growth to be supported. And while there are risks to the advertising business, the “Other Bets” assets are losing money. Those losses will reverse at some point, whether through the businesses achieving profitability or Alphabet simply shutting them down.
It’s not time to panic — and it certainly isn’t time to short Alphabet stock. But in a more nervous market, there’s at least the near-term risk of sentiment toward Google changing rather rapidly. That, at least, could mean that $1,000 won’t serve as support for Alphabet stock forever.
As of this writing, Vince Martin has no positions in any securities mentioned.
