Shares of Alphabet (NASDAQ:GOOGL,GOOG) seem cheap again. Backing out a massive net cash position of some $150 per share, GOOGL stock trades at about 18x 2020 consensus EPS. That’s one the lowest multiples Alphabet stock (or Google stock, as many investors still call it) has received in some time.

And it’s a multiple that, on its face, seems absurdly low. Even in a disappointing first quarter, Alphabet grew revenue 17% year-over-year – and 21% excluding the impact of the stronger U.S. dollar. As I wrote earlier this year, Alphabet earnings are somewhat difficult to decipher, given European Commission fines.

Also it’s unclear what are the effects of a new accounting standard. Alphabet now books paper gains in its equity securities *which include Lyft (NASDAQ:LYFT), Care.com (NASDAQ:CRCM) and many others) as profit, or loss, in each quarter. But clearly, profits are headed in the right direction.

Yet GOOGL stock has become even cheaper since its earnings miss. And I’m skeptical a bottom is coming just yet. The Q1 report highlighted some of the long-term concerns I’ve held about Google stock for some time. With those concerns now held more broadly, and investors clearly getting nervous, Alphabet stock can keep falling back to the triple digits.

GOOGL Stock Tumbles After Earnings

Alphabet’s Q1 had echoes of the Q2 earnings report from Facebook (NASDAQ:FB) last year. To be sure, Alphabet’s quarter wasn’t nearly as troublesome: Facebook stock posted the largest single-day loss of market value in history. But Google stock declined 7.5% after the report, suggesting a $68 billion loss, more than half the $123 billion wipeout Facebook saw.

In both cases, the issue wasn’t necessarily the quarter at hand. In both cases, the concern was unofficial guidance for higher costs, with Alphabet’s revenue miss adding another layer. Operating margins for the core Google business have been compressing for some time, in part due to higher TAC (traffic acquisition costs). But TAC actually declined as a percentage of revenue in the quarter – yet the margin compression continued.

On the Q1 conference call, management seemed to forecast that higher spend would continue. CFO Ruth Porat even said that marketing expense was somewhat low and would normalize in Q2. Combined with a drop in revenue to 17%, the fear is obvious. Lower margins and slower revenue increases mean light earnings growth. Light earnings growth is a problem for Google stock, even at current levels.

The Advertising Problem for Alphabet Stock

The issue isn’t just fundamental, however. Alphabet remains essentially an advertising business: 88% of 2018 revenue came from advertising. The company’s “Other Bets”, including Access (fiber and internet access), life sciences startup Verily, and autonomous driving developer Waymo, remain unprofitable.

Q1 earnings, in particular, highlight concerns on both fronts. Network revenue rose just 8% year-over-year. Slowing search revenue growth in the U.S. and Europe leads to worries that Amazon.com (NASDAQ:AMZN) is taking market share in online advertising. A resurgent Facebook and stronger performance from social media leaders Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) only adds to the competition.

Longer-term worries aren’t completely gone, either. There’s still the fear that increasing usage of apps on mobile devices will bypass Google’s search capabilities. That fear, as mobile adoption grew at the beginning of this decade, kept a lid on what was then Google stock. GOOGL traded sideways for almost three years.

Alphabet simply can’t afford any weakness in advertising. That weakness appeared to arrive in Q1, however, and combined with higher costs, suggests that earnings expectations need to come down.

The Other Bets Problem

The importance of advertising to GOOGL stock is amplified by the fact that Alphabet simply hasn’t done that well outside of search. Waymo is likely the exception, even as it remains unprofitable. That aside, however, Alphabet’s non-search businesses have generally struggled.

That, too, continued in the first quarter. Pixel sales declined year-over-year, per the Q1 call. Google Fiber has never gained much traction. YouTube TV helped revenue, but no doubt contributed to the higher spending. So did data center costs.

Google Cloud is a distant third to Amazon and Microsoft (NASDAQ:MSFT). Google Assistant lags Amazon’s Echo. YouTube Gaming has been shut down after being routed by Twitch, which was acquired by Amazon.

Putting valuation aside, the story behind GOOGL stock doesn’t look that compelling. The company is dominant in search but that business faces potential long-term, secular challenges. Waymo is intriguing, but even aggressive valuations suggest it supports only about 10% of the GOOGL stock price. Everywhere else, Alphabet simply isn’t winning.

The Path to Triple Digits

The combination of advertising concerns and weakness elsewhere is why Alphabet stock has reversed so sharply. And it’s not clear what exactly stops the declines. The broader market clearly is showing signs of cracking under trade war fears. Competitive pressure isn’t going to ease.

A further market decline likely sends GOOGL even lower – and, yes, a sub-$1,000 price isn’t out of the question. Lower 2020 EPS expectations – think something closer to $50 – and a mid-teens multiple get the stock to $950 or so.

GOOGL very briefly dipped below $1,000 during the December sell-off – but it likely doesn’t take that kind of broad market weakness to re-test those levels. The market sees Alphabet differently now than it did then. Until the company can change that perception, further share price declines wouldn’t be a surprise.

As of this writing, Vince Martin has no positions in any securities mentioned.