Alphabet (NASDAQ:GOOG,GOOGL) has resisted pressure for years from investors, Wall Street analysts, and the Securities & Exchange Commission to provide more detailed financial information about the performance of its YouTube business. It’s frustrating because investors in Google stock have really no understanding how YouTube fits in, even though Wall Street analysts say the video-sharing site was partially responsible for its recent disappointing earnings report.
Google is in a tough situation, though, which should dissuade anyone from buying Alphabet stock.
Wall Street analysts agree that YouTube, which Alphabet’s predecessor Google bought for $1.56 billion is a big deal for GOOG. Analysts pegged the division’s 2018 revenue at between $11 billion and $20 billion, roughly 15 percent of its overall sales of $136.8 billion.
That forecast would put YouTube in some pretty august company in the tech world since revenue at Netflix (NASDAQ:NFLX) was “only” $15.8 billion last year, Twitter’s (NASDAQ:TWTR) sales were “only” $3 billion and ride-hailing service Lyft (NASDAQ:LYFT) reported 2018 revenue of $2.16 billion.
As MarketWatch noted in a column last year, the SEC raised questions in 2017 about whether Alphabet violated revenue recognition rules requiring companies to disclose relevant financial information to investors at the same time as their top decision maker.
The company noted that Chief Executive Larry Page was its “top decision maker” though he only sees basic YouTube information on a quarterly basis that doesn’t include profitability and expenses.
“The SEC spent months asking for more granular explanations about what Page sees, why he is the one who sees it, and what he does with it,” MarketWatch said. “The SEC seems to have accepted Alphabet’s response, for now, posting a January letter that said it has completed its review.”
YouTube and Google Stock
However, companies who are reluctant to disclose information rarely do so because they are hiding good news. During the most recent quarter, the rate of growth on YouTube ads slowed to 39 percent, down from the 50 percent plus increases the company reported in recent quarters.
Chief Financial Officer Ruth Porat noted during the conference call that YouTube’s results reflected, “changes that we made in early 2018, which we believe are overall additive to the user and advertiser experience.”
Porat is referring to changes YouTube has made under pressure to crack down on hate speech. However, since YouTube is a financial “black box”, it’s impossible to properly analyze the company’s claims.
Alphabet is insulated pressures from short-term investors to bolster the financial performance of YouTube since co-founders Page and Sergey Brin controls the company through its controversial dual-class stock ownership.
Though I am in favor of investors focussing on growth for the long-term, investors have a right to know if GOOG is sending good money after bad. The hole in GOOG financial disclosure is too big to ignore and is reason enough for investors to avoid the stock.
The Bottom Line on Google Stock
Google stock certainly does look tempting to buy in the wake of its recent dip. The stock is trading at a 12 percent discount to the average 52-week price target of $1,300. Until the questions about YouTube are cleared off, investors would be wise to take a pass on GOOG stock.
Jonathan Berr doesn’t own shares of any of the stocks discussed here.