These Are the 3 Scariest Risks for Alphabet Stock

I’ve been bullish on Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) for some time. One of the biggest reasons is that the company has an assortment of assets that are dominant in their categories. Consider that the main Google property, YouTube, Gmail, Maps, Chrome, Android and Play all have over 1 billion users. Plus Google stock still looks like a perennial winner.

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Furthermore, the company continues to invest heavily in new technologies, such as AI (Artificial Intelligence), AR (Augmented Reality), VR (Virtual Reality) and IoT (the Internet-of-Things). The result has been the development of standout products like Google Assistant and Google Home.

And there’s something else about GOOGL stock: It has a reasonable valuation, in terms of the growth rate. Consider that the forward-price-earnings multiple is about 20X.

But of course, the history of the tech market shows that it is extremely difficult to maintain a lead. Just look at the implosions of companies like Nokia (NYSE:NOK) and BlackBerry (NYSE:BB).

Now this is not to imply that GOOGL stock is in grave danger. It’s not.

But then again, it’s always important to consider the risks – and there are certainly a few that are problematic and could be long-term issues. So then, let’s take a look at those for Google stock:

Google Stock: Escalating Costs

Outside of the search business, GOOGL has been aggressively ramping up costs. The result is a drop-off in margins, going from 24% to 21% on a year-over-year basis.

This should be no surprise as engineering talent continues to get more expensive. Note that in the latest quarter, GOOGL shelled out a hefty $6 billion in R&D, up about 40%.

But there are other areas where costs have been heating up. One is premium content for YouTube. Let’s face it, Netflix’s (NASDAQ:NFLX) huge spending has had a big impact. Over time, we’ll probably see further pressures from Apple (NASDAQ:AAPL) as well.

Google Stock: Complexity

GOOGL is definitely a complex organization. Keep in mind that the company has nearly 99,000 employees.

So yes, managing this organization is no easy feat. If anything, when a tech company becomes a conglomerate, the valuation of the stock can easily get muted as strong assets get diluted by the weak ones. We saw this happen to Cisco (NASDAQ:CSCO) back in the early 2000s. The result was a prolonged period of underperformance for the stock price.

As for GOOGL, it’s far-flung structure may mean that YouTube and Waymo are not being valued properly. But there could be another big issue: bureaucracy. In other words, it could be getting more difficult to move quickly. This may explain weakness in core businesses like Google Cloud.

Google Stock: Ad Business

Despite efforts at diversification, about 83% of the revenues for GOOGL come from its ad business. Granted, this has not been much of a problem. It certainly helps that the company has been agile when adapting to changes in the market.

A notable case of this was the transition to mobile, which involved the development of the Android platform (it powers 86% of the world’s smartphones). Keep in mind that GOOGL still processes 93% of global search volumes.

But it could get more difficult for the ad business in the coming years.  Part of this is from pressure of social media operators like Facebook (NASDAQ:FB), Snap (NYSE:SNAP), Pinterest and so on.

Although, Amazon (NASDAQ:AMZN) could pose the biggest danger. The company definitely has a pretty good track record when it comes to disrupting markets.

Regarding its ad business, it is running on all cylinders. According to research from eMarketer, AMZN is expected to eat into the market share for GOOGL in 2019. The forecasts calls for AMZN to get nearly 9% of the U.S. ad market, up from 6.8% in 2018.

The company has some key advantages. For example, AMZN has a massive distribution footprint, which includes devices. But the core ecommerce platform is ideal for advertising since there is a tight relationship between searching and purchasing — which should allow for much higher ROI on spending.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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