Don’t Buy Google Stock Until a Positive Catalyst Emerges

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GOOG - Don’t Buy Google Stock Until a Positive Catalyst Emerges

Shares of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), the parent company of Google, continue to struggle. Despite Alphabet’s robust earnings and revenue growth, investors have sold GOOG stock as competition and data privacy concerns weigh on the shares.

In the long run, growing profits and falling multiples will revive GOOG. However, unless a new, positive catalyst emerges for GOOG, Alphabet stock will probably continue to decline in the near-term.

GOOG Continuing to Fall Amid Bad News

Bad news and competitive challenges have taken their toll on GOOG stock. The shares have lost more than 18% of their value since late July, leaving them slightly above their 52-week low.

The price-earnings ratio of Alphabet stock now stands at 24.9, above the average valuation of the S&P 500. However, it’s well below the average price-earnings ratio of 30.9 that GOOG has enjoyed over the last five years. Moreover, Alphabet had the second-largest market cap behind Apple (NASDAQ:AAPL) as recently as a few months ago. Today, the market cap of GOOG also lags behind those of Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) .

The threat of increased competition from Amazon in the digital ad market has hurt GOOG stock. For all of the focus on Google Home, Google Internet Traffic, and GOOG’s other, numerous offerings, most of Alphabet’s revenue is still generated by digital ads.

The threat of regulatory crackdowns by European regulators has also weighed on Alphabet stock. The European Union’s General Data Protection Regulation (GDPR) is forcing tech companies to comply with strict data protection rules. Alphabet recently violated GDPR by withholding details about a leak of user data.

GOOG’s Revenue, Earnings Growth Remains Robust

Still, investors must put GDPR into perspective. The rule could actually end up helping Google and Alphabet stock, since the high costs of complying with it will prevent many small companies from competing with GOOG.

Moreover, the issues facing GOOG don’t threaten its viability, and most large companies deal with these types of problems at some point. Consequently, most of the selling of Alphabet stock appears to be driven by unwarranted fears.

The company’s earnings and revenue are continuing to grow significantly, even though its results have fallen short of analysts’ expectations at times. Analysts’ consensus estimate calls for the company’s revenue growth to come in at 23.1% this year and 19.3% in 2019, roughly in-line with the top-line growth it has generated in recent quarters. Analysts on average predict that the company’s profits  will rise 29.6% in 2018 and 12.5% next year.

Analysts’ consensus estimates call for the company’s earnings to continue growing at least 10% for the next five years. No matter how bad the news is, at some point, the price-earnings ratio of GOOG stock will become too low, and investors will begin again to bid Alphabet stock higher.

GOOG Needs a Catalyst

However, rather than wait for that point to come, the company can create its own catalyst by launching a dividend. With more than $106 billion in cash on its balance sheet, GOOG could easily afford to take this step. Moreover, most other companies its size (and many smaller ones) do return cash to their shareholders. Furthermore, such a catalyst would likely increase the market cap of GOOG stock by a larger amount than the payout.

GOOG stock definitely needs a catalyst. Admittedly, Alphabet stock will probably move higher in the long run even if the company does not start paying a dividend. However, until GOOG receives some good news, Alphabet stock will likely languish.

Final Thoughts on GOOG

Alphabet needs to turn its narrative around if it wants to boost GOOG stock soon. GOOG has suffered as competitive threats to its ad business, data privacy concerns, and worries about increased regulation have weighed on the minds of investors. As GOOG stock begins to approach its 52-week low, investors continue to sell the shares despite their lower-than-average valuation.

While Amazon and the GDPR issues should only hurt Alphabet stock temporarily, investors need a compelling reason to buy the shares. By introducing a dividend, GOOG could quickly change its outlook and induce more investors to buy Alphabet stock. But even if Alphabet does not take this step, double-digit profit growth and a falling price-earnings ratio will boost GOOG at some point.

However, investors will not clamor to buy GOOG stock again until the company announces positive news or its profit growth accelerates. Until at least one of those catalysts emerge, I would avoid GOOG stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/wait-inducement-buying-goog-stock/.

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