There’s No Telling How Much Longer Its Ad Moat Will Protect Alphabet

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Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is a big winner in the digital ad space, with a huge market share that consistently pours out profits. GOOG stock reflects the effective moat it has in digital advertising.

There's No Telling How Much Longer Its Ad Mote Will Protect GOOG Stock

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The stock is down just 5.3% on a year-to-date basis, but up 1.4% on a year-over-year basis. Most stocks are down a lot over the past year.

As I suggested, the main reason is its steady Alphabet’s main advertising business. It represents over 83% of the company’s total $161.8 billion in revenues. Google’s digital ad revenues were $134.8 billion, up 16% over last year.

The Ad Moat and GOOG Stock

Google’s digital ad revenue represents an astounding 36% of the total digital ad market. According to Statista, 2020 digital ad revenues will be $374.2 billion. But here is what makes its market share so valuable. Digital ad spending is taking over traditional ad spending.

A very thoughtful article this week in Seeking Alpha by Rob Barnett points this out. He explains that digital ad spending was 55% of total global ad spending ($593 billion) as of 2018. By 2020, the percentage will be even larger. Barnett argues that by 2o24 digital ad spending will reach 80% of total ad spending.

Moreover, Google and Facebook (NASDAQ:FB) effectively control well over 57% of the digital ad market.  By extension, this duopoly controls over 45% of total ad spending in the world (i.e., 57% times 80%). Over time that percentage will increase.

So, in effect, companies are basically shifting their ad dollars from traditional media to digital online ad venues. That only increases the stability and power (i.e., the “moat”) of Google’s ad franchise.

Barnett argues that as a result of the novel coronavirus, companies are going to be more reliant on digital ad spending. Here is why: since total ad spending will likely be lower until 2023, but digital ad spending will not fall as much, its percentage of the total will increase.

Late last year, the Wall Street Journal published an interesting article on how Google became a juggernaut in the digital ad market. One of its greatest coup’s was the 2008 purchase of Doubleclick for just $3 billion.

That investment has paid off in spades since then. No wonder GOOG stock has an $880 billion market value right now.

Risks to Its Franchise

But the Wall Stree Journal pointed out that regulators are looking into Google’s effective role as both digital auction ad house and a dominant ad bidder. Google argues that the way its products work together is why its products are so attractive to ad buyers.

Another major risk is that global media companies are raising copyright concerns about Google using their content for free. For example, on Monday, April 20, the Australian government said Google and Facebook would have to pay media outlets for news content in the country. According to the New York Times, this is part of an emerging global effort to rescue local publishers by moving to compel tech giants to share their advertising revenue.

That could cut into Alphabet’s profits. So far there is no way to quantify how much that would cost. But if other governments follow Australia’s lead, Google could end up having to share its ad revenue from content published without copyright permissions.

What Should Investors Do With GOOG Stock?

Right now Alphabet stock looks reasonably fairly valued. The issues related to its digital ad moat could take several years to play out. They could hurt its basic underlying ad revenue growth rates.

Moreover, it trades for about 26 times forward earnings. The company does not pay a dividend. This is not a cheap valuation and does not include any margin of safety.

Alphabet does have a pristine balance sheet, with $119.6 billion in cash and equivalents and just $29 billion in long-term liabilities. So, in effect, GOOG stock reflects its underlying business strength and revenue stability.

The issue is whether the economic and business risks could begin to overtake the outlook on the company’s basic growth prospects. It might be worth waiting to look for a better opportunity to buy GOOG stock. There might be a time to buy when there is more of a margin of safety going forward.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/no-telling-ad-mote-protect-goog-stock/.

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