After suffering along with the rest of the markets in the second half of last year, the owners of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stock looked forward to a better performance in 2019. However, Alphabet stock has been rather choppy so far this year. With the shares now back near their all-time highs following Google’s strong Q2 earnings report, can investors trust Alphabet stock?
It’s a question that deserves serious consideration. Over the past year and a half, the GOOGL stock price has been rangebound. Although the optimists have many reasons to be bullish on Alphabet stock, severe headwinds have spoiled the party. One of the biggest headwinds is the specter of regulators mandating a break-up of the company.
Primarily, the biggest draw of Alphabet stock is the dominant market share of Google’s search engine. As of June 2019, Google search engine had a nearly 93% share of the global search engine market. Despite talks of emerging competitors like Baidu (NASDAQ:BIDU), Google still has a huge lead on them.
But increasingly, GOOGL stock price has climbed due to the potential of Alphabet’s multiple businesses. However, that optimism will evaporate if the government gets involved. If Alphabet is broken up, it will become a series of smaller parts unable to leverage a massive corporate umbrella’s synergies.
Moreover, this wouldn’t be the first time that Alphabet stock skyrocketed, only to be undone by some bearish news. After all, the company’s disappointing Q1 earnings release short-circuited the journey of Alphabet stock to all-time highs.
If conservative investors want to sit on the sidelines when it comes to Alphabet stock, I completely understand. But for the risk-tolerant, Alphabet stock offers a compelling long-term opportunity. Here are three reasons why that’s the case:
The Rally of Alphabet Stock Was Overdue
Looking at the Q2 results, it’s easy to focus on the fact that GOOGL stock price jumped nearly 10% in a single day. However, a far more interesting story exists within the details.
Namely, Alphabet’s revenue growth has been strong for several quarters. However, Alphabet stock hasn’t always aligned with the positive fundamentals. Thus, the surge of GOOGL stock price has been a long time coming.
Since the first quarter of 2017, the average year-over-year growth rate of Alphabet’s top line is 22%. However, during the same period, the average year-over-year growth rate of GOOGL stock price is only 18%. Typically, and especially with tech stocks, share prices should climb much faster than sales.
Instead, it’s almost as if the markets were waiting for a good time to jump on board Alphabet stock.
For patient investors, now is probably that time. Alphabet blew past analysts’ average earnings per share estimate of $11.30 with EPS of $14.21. Revenue of $38.94 billion also beat the consensus outlook, which called for $38.15 billion.
But the internet giant has consistently reported strong results. I guess Alphabet is just now getting credit for them.
The Feds Won’t and Actually Can’t Break Up Alphabet
In recent months, we’ve heard a lot about federal watchdog agencies taking a good look at big tech. And of course, Alphabet is no angel. The company has aroused anger on both sides of the Atlantic. Plus, the European Union has wasted no time leveling penalties on Alphabet for alleged anti-competitive behavior.
Fines are one thing. But a breakup of Alphabet is not going to happen for the same reason it’s not going to happen to Facebook (NASDAQ:FB). Simply put, both these companies are too important for national security reasons.
On the surface, my statement might sound over the top. Actually, it’s a very reasonable opinion. You see, our international adversaries are wasting no time preparing the groundwork to eventually dominate us in next-generation technologies. China has publicly expressed its goal of leapfrogging the U.S. in artificial intelligence by the year 2030. Putin’s Russia wants to do the same.
Right now, no one can touch us in terms of technological acumen or the ability to spark groundbreaking innovations. However, we must maintain that edge against ever-aggressive adversaries.
What we cannot do is to shoot ourselves in the foot during this high-stakes tech cold war. Thus, you can expect politicians to wax poetic about breakups. But no one’s actually serious about this, which bodes well for Alphabet stock.
Multiple Growth Opportunities for GOOGL
Ignoring the fear-mongering about a breakup, we can freely consider one of the most exciting catalysts for Alphabet stock: the underlying company’s multiple revenue growth opportunities.
If search engine domination wasn’t enough, GOOGL stock offers significant exposure to cloud computing. Although Amazon’s (NASDAQ:AMZN) AWS platform leads this segment, Alphabet is putting up a very competent fight against Microsoft (NASDAQ:MSFT) and its Azure platform.
Moreover, Alphabet has synergistic products that complement its cloud ambitions and its other projects. With devices such as the Pixel smartphone and the Home smart speaker, Alphabet has created a viable connected ecosystem.
Finally, with so many resources, the company can afford to support units that are strictly devoted to innovating. While advancements such as driverless vehicles may not be ultra-profitable right now, they have laid the foundation for future growth. Given this potential, Alphabet stock deserves its recent leap forward.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.