Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is one of the largest, most widely followed companies in the market. Year-to-date, Alphabet stock is up about 12%. And following the recent earnings result, many investors are quite upbeat about the internet giant’s fundamentals. Yet with August, the mood in the broader markets has changed and the GOOGL stock price has suffered along with other tech heavyweights.
Could the second half of August provide contrarian opportunities in Alphabet stock? In my opinion, it’s not an opportunistic time to buy into GOOGL shares yet. Today, I want to discuss the three short-term risks that shareholders may want to factor into their near-term investment decisions.
GOOGL Stock Cannot Be Immune to Geopolitical Risks
Geopolitical events matter for financial markets both in the U.S. and globally. And equity markets worldwide are facing a cocktail of geopolitical risks now, leading to constant investor sentiment ebbs and flows.
The biggest headwind here is the U.S.-China trade war, which appears to be worsening. Worryingly, the trade war may end up becoming a tech war as protectionism takes hold in many countries.
Furthermore, Hong Kong has suffered weeks of political protests. Naturally, this uncertainty has led to further choppiness in the Chinese and Hong Kong stock markets.
Also on Monday, many investors noticed that the Argentinian peso and stocks have suffered big drops. This volatility is due to the unexpected results in the presidential primaries over the weekend. Markets are now pricing in the possibility that a more protectionist government will take power in Argentina toward the end of the year. As a result, credit-default swaps have spiked. Analysts believe that the potential new government may possibly default on the country’s debt.
And if this important cog of the Latin American economy fails, Alphabet stock cannot avoid the ensuing volatility.
Investors may expect even more global turbulence as Britain gets ready to leave the European Union on Oct. 31, 2019. There might even be a snap election in the U.K. that could complicate the Brexit process further.
In other words, we may be entering a period of an unprecedented reactionary environment. Markets suffer during times of increased uncertainty. And in the coming months, I expect tech stocks, including GOOGL stock, to be a battleground between investors and traders.
Alphabet Stock May Face Antitrust Issues
Since June, the U.S. Department of Justice has indicated they may go after several big tech names for antitrust issues. Conspicuously, this includes Alphabet.
Scholars and analysts have long debated the potential effects of antitrust policy on consumer welfare. Yet, for shareholders of Alphabet stock, it simply means uncertainty.
About 85% of the company’s revenue comes from advertising. The group is estimated to have a 37% digital advertising market share in the U.S. Its closest competitor, Facebook (NASDAQ:FB), has about 20% of the market. Therefore, it’s not a big surprise that both companies could find themselves in the middle of an antitrust investigation.
At this point, it’s hard to know what the outcome of this investigation would be on the GOOGL stock price. However, investors may follow a familiar playbook to mitigate scandals for big companies: sell Alphabet stock now, and ask questions later.
Other countries or regulators, such as the EU, may also follow the U.S. in probing Alphabet and its ilk. Could further antitrust scrutiny expose the group to shareholder litigation?
Stocks tend to behave differently in a falling market than they do in a rising one. The down moves can be rather fast in a declining market. A momentum trade like Alphabet stock may become a falling knife. I personally do not like catching falling knives.
Today, I’m not entirely convinced that GOOGL shares have found a bottom yet. They will continue to be volatile on a daily and weekly basis. If the investigations intensify, Alphabet stock risks declining to triple digits, possibly towards the mid-$900 level.
Nearer-Term Charts Urge Caution
Alphabet stock initially went up at the end of July following a positive earnings report released on July 24. On July 26, Alphabet shares saw a recent high of $1268.39.
However, news about the trade war with China followed by Hong Kong protests have pressured the GOOGL stock price down. Shares are now hovering around $1190.
As a result of this recent drop, the technical outlook of GOOGL stock has been damaged. Its nearer-term chart still looks weak, and Alphabet stock looks poised to drop even more.
Although GOOGL’s short-term momentum indicators are currently in oversold territory, they can stay oversold for quite a long time.
I would suggest that long-term investors wait until Alphabet stock builds a base between $1200 and $1100. If the broader markets decline further, GOOGL is likely to revisit its Dec. 2018 low of $977.66.
However, most tech stocks, including Alphabet, are currently oversold. Therefore, a relief rally was inevitable. And it came on the morning of August 13.
Going forward, if current trade tensions or the Hong Kong protests are swiftly resolved or the Justice Department cancels the antitrust probe, then the GOOGL stock price could rebound quickly.
For retail investors, discipline would be rather crucial at this point.
The Bottom Line on Alphabet Stock
At present, the markets are in a thick blanket of geopolitical risks. Alphabet stock may have further company-specific risks due to antitrust probes.
In general, it is hard for retail investors to know how and when to react to such increased uncertainty globally.
Therefore, investors may consider waiting on the sidelines if they do not currently have any positions open in GOOGL stock. If they already own Alphabet shares, they may consider two options: riding out the volatility patiently, or taking some money off the table during this market bounce.
Current shareholders may also hedge their positions. As for hedging strategies, covered calls or put spreads with Sep. 20 expiry in Alphabet stock could be appropriate. That’s because straight put purchases are likely to be expensive due to heightened volatility.
There may be further negative impact on Alphabet stock from various short-term risks. However, it is also important to remember that fundamentally strong stocks typically recover over time. Therefore, investors should not panic and take important investment decisions in haste. If shares fall any further, then long-term investors will be given a better entry point.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.