Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) investors need not complain about the stock’s performance. With a market capitalization just over $1 trillion, Alphabet stock rewards loyal shareholders. Yet those gains are a double-edged sword. In growing profits at an enormous rate, the search engine giant is worsening the user experience. The company is in danger of over-saturating its users with too many ads.
Ask your friends if searching on Google still brings up what they are looking for on the first page. And also ask if the search engine is showing too many ads at the top. If the answer is a “yes” to the second question, risks are increasing that users may find alternatives. Very recently, the company back-tracked a redesign on the display of new search results. The change would have shown ads as if they were legitimate results.
Increasing clicks for advertisers would have brought in plenty of revenue, but it would frustrate users. Similarly, the video platform YouTube now shows two ads, one after the other, before a user may view some content. With every increasing dollar of profit per share, the stock will just keep soaring.
Alphabet’s reliance on advertising via Google.com poses a risk for investors. As Disney (NYSE:DIS) invests in Disney Plus, Apple (NASDAQ:AAPL) on Apple TV Plus, and Netflix (NASDAQ:NFLX) subscriptions grow, YouTube may become out of date. Alphabet is diversifying its business. It bought Fitbit (NYSE:FIT) for $2.1 billion. It is trying again to influence shopping ambitions by buying Pointy for $160 million.
In the gaming space that is largely dominated by Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two (NASDAQ:TTWO), it is investing in Google Stadia. Stadia launched in November 2019 but in 2020, it will have more than 120 games on the platform. Currently, Stadia has 26 games and one exclusive title. And in the next few months, gamers may expect support for 4k gaming on the web, more support on Android Phones and wireless gaming through the Stadia controller.
Fair Value on Google Stock
Investors may forecast revenue growing by least 10%-15% in a five-year discounted cash flow model: earnings before interest, tax, depreciation and amortization (EBITDA) exit model. At a conservative discount rate of 10% and a terminal EBITDA multiple of 18 times, Google stock has a fair value of $1,529.
The above stock target is not far from analysts’ average price target of $1,615. And given Google’s high growth score of 99 from Stock Rover, investors are getting good value. The industry growth score is 53 and the S&P 500 has a growth score of 77.
Apple reportedly spent billions of dollars to improve its Maps app. Although it is unlikely, Apple Map enhancements may sway users away from Google Maps. This is a low risk that investors should still consider.
Lower consumer spending due to slowing global economic activity is another risk. Advertisers will cut back on advertising spending, too. This would put pressure on Google’s near-term growth.
Google has room to squeeze in more ads in several areas of its web properties. Although more ads have the potential to be frustrating, users are typically too lazy or too fixed to find alternatives. Brave Browser, DuckDuckGo search and Firefox browser are substitutes. But for now, there is no evidence suggesting anyone is leaving Google Chrome or Google search. So, holding Google stock should still pay off.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.