Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) is continuing to make moves on the M&A front. The search advertising giant made another splash recently, announcing an all-cash purchase to buy Fitbit (NYSE:FIT) for $2.1 billion, or $7.35 per share. And the market seems reasonably pleased, Google stock is near its all-time high.
That’s obviously gotten a ton of attention. Fitbit itself is not a huge business; it has revenues of about $1.5 billion per year and is hardly growing. This won’t move the needle for Google stock in the near-term.
The bigger play, however, is in the wearables space, which is a major opportunity. Analytics firm Gartner suggests that wearables will be a $35 billion market over the next few years, so Fitbit will give Google a major inroad there to compete with rivals like Apple (NASDAQ:AAPL).
There’s also the natural interplay between various existing Google services. The company claims it won’t use Fitbit data to target ads at users; even so, it should be able to use Fitbit to promote its operating system and help lock in users on Google devices and services.
In all the excitement about wearables, however, it’s worth looking at another strategic push Google is making which, so far, has drawn less scrutiny. This is Google’s effort to take a major chunk of the online travel bookings market, a move that will be a huge benefit to Google stock.
Travel, Review and Google Stock
Quick, name a relatively large American internet company whose stock is down 50% this year. You probably can’t come up with one that quickly; it’s been a good year for most tech and online firms except for some based in China.
Yet Tripadvisor (NASDAQ:TRIP) has managed this feat, dropping from above $50/share to just $28 now. Zoom out and it gets even worse; TRIP stock was worth $100 per share in 2014.
Yelp (NYSE:YELP) looks the same; YELP stock traded for as much as $95 in 2014, it goes for just $34 now. Turn to Expedia (NYSE:EXPE), and its stock fell 25% in a single day earlier this month following a terrible earnings report. Even the big dog, Booking (NASDAQ:BKNG), formerly known as Priceline, has seen its shares drop 10% recently on industry worries.
And what’s the concern in particular? That would be that Google is going to eat everyone’s lunch in this space. Here’s the deal. Companies like Yelp and Tripadvisor built their businesses around collecting reviews and building social interest. People got into the habit of checking those sorts of sites before booking a restaurant, hotel, or other such trip or experience.
Now, increasingly, Google is taking a chunk of that business directly, and cutting out the middleman.
Ads, SEO and Google Stock
Why isn’t Yelp or Tripadvisor’s model working so well anymore? That’s because Google has added more advertisements to its search results. In the old days, organic search results appeared at the top of the screen. Then Google put in a paid ad or two. Now it is up to four in many cases.
On a large desktop screen, that’s not a big deal, people can still see the organic search results quickly. With most searching and buying activity moving to mobile, however, the old model no longer works.
Google’s ads now monopolize most of the screen space, and users have to scroll down – often repeatedly – before getting to results from the likes of Yelp or Tripadvisor that they would have seen immediately in past years.
This is obviously turning out to be very profitable for Google; its search business continues to grow nicely while its rivals have fizzled out. And now, it is turning on the big guns. With the Google Hotel Module, for example, online travel agents such as Expedia are having to pay to get top billing on Google’s results whereas they could get this organically – and for free – in the past.
Expedia Admits Weakness
On the latest conference call, the one attached the quarter that shaved $35/share off Expedia’s stock price, the CEO said as much:
“Although room night growth was in a healthy range in Q3, adjusted EBITDA was lower than we expected, primarily due to a few key factors. We saw incremental weakness in SEO volumes and a related shift to high-cost marketing channels […] And generally, what we saw was a continued shift of essentially the free links further down the page by other modules that were inserted and ultimately a shift of traffic from the SEO channel over to some of the other products, whether it’s flight metasearch or hotel metasearch over time.”
There it is. Straight from a rival CEO, you can see how Google is squeezing out the profit margins from its competitors and taking it for itself. And unlike Fitbit, this isn’t small potatoes.
Expedia still has a $14 billion market cap, even after its recent plunge. Booking is worth nearly $80 billion. As Google incrementally takes more of the profit pie away from these more specialized websites, it will add to Google’s already dominant position in search and advertising.
Google Stock Verdict
It’s not hard to make the case for GOOG stock here. Alphabet is selling for just about 25x forward earnings, which is hardly egregious for a company that is growing revenues at 20% year-over-year. On top of that, there’s no real alternative for online advertisers and the market only continues to grow.
Facebook (NASDAQ:FB) and GOOGL stock make up a duopoly that control half the overall market. Something dramatic would have to change for Alphabet stock to stop being a long-term winner.
The recent plunges in shares prices for online review and bookings sites such as Expedia show that if anything, Google’s moat is still growing, rather than shrinking.
At this point, if I owned Google stock, my biggest fear would be antitrust worries. The company keeps paying large fines, particularly in Europe, and regulators in the U.S. have turned up the heat as well. Yelp has been complaining that Google has acted anti-competitively for years, and now others are making that case too.
Will the status quo continue, with Google sucking up more and more of the overall profits out of internet search, or will regulators say enough is enough? That’s a big story to watch for Google, particularly as the 2020 election heats up and candidates unveil their plans to regulate Big Tech.
At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.