Perhaps no company has brought more innovation to the tech industry than Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). Since its founding as Google in 1998, GOOGL stock has moved higher by cementing its domination in search, online ads, powering smartphones and other tech endeavors.
However, other than Apple (NASDAQ:AAPL), it trades at a lower price-to-earnings (PE) ratio than other large peers in tech. GOOGL has seen a major competitive threat emerge in the ad space that still accounts for the majority of its revenue. However, given its hold on an enormous cash hoard and many lucrative subsidiaries, the biggest threat to GOOGL stock may be Alphabet itself.
GOOGL Remains Dependent on Ads Despite Innovation
To me, GOOGL stock is the most frustrating of tech equities. The company benefits from some of the more powerful apps around. The Google search engine still enjoys a market share of almost 93% worldwide. Also, despite the attention paid to Apple’s iOS, Android powers nearly 86% of the world’s smartphones.
Moreover, Alphabet leads in so many other categories that it may have become the most massive wellspring of innovation in the tech industry. YouTube remains the most popular online video platform. Waymo maintains its lead in the development of self-driving cars. Google Home and Google Cloud, while not dominant, have held up well against their peers. Also, Verily Life Sciences will probably make GOOGL a major player in an emerging healthcare tech field.
However, as our own Aaron Levitt points out, for all of its endeavors, Alphabet remains heavily dependent on ad revenue. Online ads still account for about 83% of the company’s revenue. This business faces a formidable new competitor from what may arguably serve as tech’s second-largest wellspring of innovation, Amazon (NASDAQ:AMZN). Given the online presence of Amazon, one can see why many businesses would prefer to advertise on Amazon’s platform. This poses the most serious threat since Facebook (NASDAQ:FB) to GOOGL’s largest revenue source.
Alphabet as a Threat to GOOGL Stock
Despite this threat, I would argue that the most significant danger to GOOGL stock is Alphabet itself. Part of this shows up in its finances. In past articles, I have argued that GOOGL needs to begin paying a dividend. The company maintains a $780 billion-plus market cap and holds more than $109 billion in cash, yet the dividend remains at zero. This closes GOOGL stock off to large numbers of income-oriented investors who might otherwise show interest in the equity.
Moreover, Alphabet stock trades at a forward PE ratio of 20.6. This compares to Amazon which trades at 41.3 times earnings. I think one reason for this disparity revolves around Amazon’s superior ability in unlocking its value. GOOGL stock has become a prominent example of the sum of the parts holding a much greater value than the whole. For example, Morgan Stanley (NYSE:MS) analysts value Waymo as high as $175 billion. This makes the size of one non-core division 22% of the market cap of Alphabet stock. Given this reality, one has to wonder if GOOGL should spin off Waymo and other subsidiaries?
To a degree, I understand why GOOGL stock holds on to these divisions. The percentage of ad revenue will probably continue to fall over time. For this reason, Alphabet needs to innovate and lead in other tech-related endeavors to maintain its growth rate. However, until it spins off some divisions, Waymo and other subsidiaries could struggle to realize their real value. Hence, I think GOOGL needs to sharpen its focus and set the rest of its divisions free.
Final Thoughts on GOOGL Stock
For all of the focus on its peers, Alphabet may have become the most significant threat to Google stock. In the 21st century, perhaps no company has done more than Alphabet to advance the development of tech. This has brought the company many brands that command tremendous value in the marketplace.
However, other than online ads, these divisions have done relatively little to generate revenue. Since online ads face a new competitor in Amazon, Alphabet needs some of this innovation to continue its growth rate.
However, if the estimated value of Waymo serves as an indication, Alphabet has probably stifled some of its potential in the process. The lack of a dividend also cuts the company off from income-oriented investors. As long as GOOGL stock continues to undervalue itself, investors will likely continue to undervalue GOOGL.
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.