As is the case with many large- and mega-cap technology companies these days, there are reasons to be concerned about the parent of internet search giant as well as reasons to believe Google stock could easily amass more upside.
Let’s dispense with one of the major headwinds facing Alphabet and some of the other Silicon Valley behemoths. Like it or not, Alphabet has had issues with data security, and the company probably has not done an adequate job of convincing folks on Capitol Hill that it’s a politically neutral enterprise. Hence, the ire of regulators.
FTC Chairman Joe Simons has acknowledged that breaking up a company is hard, but the FTC is still looking into that option with some of the biggest tech and internet names, including Alphabet and Facebook Inc. (NASDAQ:FB). Some presidential candidates are chiming in, too.
“Presidential candidate Elizabeth Warren, a Massachusetts senator, has been among the most outspoken about targeting Facebook, Alphabet Inc.’s Google and Amazon, saying earlier this year that they have too much power and should be broken up,” according to Bloomberg.
For Alphabet stock bulls, the good news is that markets appear to be assigning long odds on a legitimate breakup of the company. While it’s lagging the Nasdaq-100 Index by more than 600 basis points, Alphabet stock is up 15.65% year-to-date.
Good News for Google Stock
Assuming nothing extraordinary emerges, the regulatory headwinds facing Alphabet are largely baked into the stock. There’s no denying the company is an earnings powerhouse. Last month,Alphabet reported a second-quarter profit of $14.21 a share, beating estimates of $11.30.
“Alphabet dominates the online search market with Google’s global share above 80%, via which it generates strong revenue growth and cash flow,” said Morningstar in a recent note. “We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in the search market.”
Speaking of cash, Alphabet ended the second quarter with $121.05 billion in cash on hand, a year-over-year increase of 18.39%. Looked at another way, Alphabet’s cash on hand is larger than the market values of more than 80% of the S&P 500.
A balance sheet like that is indeed a positive for Alphabet stock. While internet search and YouTube are mostly appreciated in the Alphabet stock thesis, another reason to consider the name is Google’s growing cloud computing footprint.
“Among the firm’s investment areas, we particularly applaud the efforts to gain a stronger foothold in the public cloud market, which is expected to grow more than 25% annually through 2021,” according to Morningstar. “Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth, creating more operating leverage, and expanding its operating margin, which we expect will continue.”
The Bottom Line on Google Stock
If an investor is going to nitpick with Alphabet stock, aside from Uncle Sam eyeing the company, the issue to focus on is shareholder rewards. While Alphabet appears loath to pay a dividend, it could do a better job of repurchasing its own shares, which, by the way are not all that expensive.
Technology and communication services companies are voracious buyers of their own shares, but in the first half of 2019, Alphabet repurchased just $6.6 billion of its own stock, barely more than the $5.5 billion in shares that went out the door for employee equity compensation, according to Barron’s.
Alphabet has shown an ability to grow earnings, but imagine how much earnings per share would increase if the company would commit to buybacks the way other tech giants have.
The company already spends north of $20 billion on research and development and with regulators on the prowl, acquisitions seem unlikely, so why hold $121 billion in cash at a time when interest rates are declining? Alphabet stock would likely get a buyback boost and investors would appreciate that.
Todd Shriber does not own any of the aforementioned securities.