Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) reported its 2019 first-quarter earnings April 29 after the close of trading. Since then, GOOGL stock is down almost 14% through May 30.
There’s a lot to like about Alphabet. However, not everything is perfect. With that in mind, here are three things to like and dislike about GOOGL stock.
3 Things to Like About GOOGL Stock
1) Free cash flow: Alphabet finished the first quarter with free cash flow of $7.4 billion, 72% higher than a year earlier. Over the past five years, its grown FCF by 17%, compounded annually. At the same time, Alphabet’s interest expense on its long-term debt increased by just 7%, leaving lots of cash to invest in new or existing businesses, repay debt, make acquisitions or repurchase shares.
2) Share repurchases: I’m not a fan of share repurchases because companies rarely buy their stock near 52-week lows. Alphabet is no exception.
In the past two fiscal years, it repurchased $14 billion of its Class C GOOG stock at an average price of $1,044.78 a share. Over those two years, its high and low share prices were $1.273.89 and $775.80 respectively.
This means that it paid 1.9% more than its midpoint of $1,024.85.
Usually, I’d describe this effort as mediocre. However, over the same period, it issued 17.6 million shares, 4.2 million more than it repurchased, which means Alphabet’s repurchasing its shares solely to maintain a level share count.
It’s got the free cash flow, so it’s a perfectly logical business decision.
3) Using AI to improve user and advertiser experience: Thanks to the company’s strong cash-flow generation, Alphabet’s able to think bigger-picture than a lot of companies. If an opportunity arises to improve the user and advertiser experience, Google acts sooner rather than later.
“We remain confident about the sizable opportunity ahead to improve the advertiser end-user experience through our ongoing commitment to product innovation, in particular by leveraging machine learning across our ads, products, and properties,” CFO Ruth Porat said during the company’s Q1 2019 conference call.
“[T]he other item is that timing of product changes in ads can impact year-on-year growth rates, and we make changes with the focus on the best interest of users and advertisers. Over the long-term, we do not manage by quarter.”
How many companies can afford to think like this?
3 Things to Dislike About Alphabet
1) Restricting marijuana sales: On the surface, Alphabet’s move to make Google Play more family-friendly seems like a great idea. Who wouldn’t be for this?
The problem is by banning apps on its app store that sell marijuana; it is merely stoking the fires of black-market cannabis sales. Not to mention it’s genuinely inconveniencing some of its developers to appear holier-than-thou in the eye of the public.
“Google’s decision is a disappointing development that only helps the illegal market thrive, but we are confident that Google, Apple and Facebook will eventually do the right thing,” said a spokesperson for Eaze, a marijuana delivery app.
This ban appears to be an act of political correctness rather than a sound business decision.
2) Slowing growth: Google stock wouldn’t have fallen by 14% in May if everything was hunky-dory. Investors didn’t like its slowing growth for a good reason. When you’re a growth stock, you’ve got to keep your foot on the gas — at least, that’s the theory.
“The challenge that Alphabet has is slowing growth. This is an industry that’s maturing. Facebook (NASDAQ:FB) and Alphabet combined will have revenue of $200 billion in 2019 and make up almost three-fourths of the industry,” said Stifel internet analyst Scott Devitt on CNBC after its Q1 2019 results.
“Online advertising as an industry itself is 40% of total advertising. Growth is more difficult to achieve and, at the same time, you have Amazon (NASDAQ:AMZN) growing into this industry. At the moment, Alphabet is the odd one out.”
As long as Amazon continues to grow its advertising business, owners of GOOGL stock have reason to be concerned.
3) Better near-term options: As Alphabet continues to work on its user and advertiser experience, which includes cleaning up YouTube, investors have better opportunities elsewhere — stocks that are driving on all cylinders at the moment such as Amazon and Microsoft (NASDAQ:MSFT).
“We believe nothing has changed about GOOGL’s long-term ability to innovate to drive engagement/monetization across its leading ecosystem,” Morgan Stanley analysts wrote in a May 14 note to clients. “But near-term uncertainty around ’19 Websites growth from GOOGL’s slowdown and clean-up (which we think was largely YouTube and tough YouTube Y/Y comps from the roll-out of TrueView for Reach) is likely to weigh on the stock’s already low multiple and performance.”
With Trump’s trade war looking to add Mexico to the list, now is not the time to be looking to make a fast buck with GOOGL stock.
Should You Like or Dislike Google Stock?
Alphabet has a great business.
While the near-term growth is hurting its share price, if you buy on more weakness over the summer months, five years from now you should be delighted with your investment
If you own GOOGL stock and you’re a buy-and-hold investor, I don’t see any reason to change course at this point.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
