If Alphabet (NASDAQ:GOOGL), the parent of Google, is overpriced, then the whole market is.
Since the start of 2020, shares of the search giant are up 13%. This put its market cap over the $1 trillion mark for the second time. The price-to-earnings multiple is 30.67.
Yet if that sounds rich, what about the wider market? The average NASDAQ stock is up 16%. The average NASDAQ stock has a PE of 22x. The NASDAQ average recently tested its pre-pandemic high of 23.2.
The reason for all this is the cloud, which Google helped develop in the 2000s. Clouds have transformed our lives over the last decade. This change has accelerated over the last several months. But not everyone welcomes our new cloud overlords.
Google, which once had the informal corporate slogan “Don’t Be Evil,” is viewed with increasing suspicion by western policymakers.
Google’s $2.1 billion acquisition of Fitbit (NYSE:FIT), a fitness band company that was going nowhere, has not yet been approved. Google has promised not to use Fitbit data in marketing, but Fitbit shares have not joined Google’s rise this year. Before Google announced its latest concession, Fitbit was down on the year. The European Commission is expected to decide on the deal by July 20.
There are bigger problems. Google’s dominance in search ads is said to be the “top priority” of U.S. antitrust cops. States are focused on Google’s advertising business and the Justice Department on its dominance in search.
Chamath Palihapitiya, a former Facebook (NASDAQ:FB) executive whose Social Capital fund has been a big winner on Tesla (NASDAQ:TSLA), is building a bear case. That case is built on Google’s status as an “incumbent,” and the growing difficulty of goosing earnings with acquisitions. Regulation, taxation, and the brittleness that drove down Microsoft early in the century are all real risks, he writes.
While Google’s gains have lagged the market, they still look outstanding when seen as absolute numbers. The company’s PE multiple entering trade July 14 was 30.5x, the market cap $1.03 trillion, but analysts now have price targets some 10% higher. One bull sees it going to $1,800.
CEO Sundar Pichai, born Pichai Sundararajan in southern India, has pledged $10 billion in Indian investment over the next five years. That could start with a $4 billionstake in Jio Platforms, the Indian mobile carrier that has already made its CEO, Mukesh Ambani, a $71 billion man.
Critics forget that Google, like Facebook, is a global business. American and even European laws are local ordinances. Google Cloud competes with Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and, most ominous of all (if you’re trying to take it down), Alibaba Group Holding (NASDAQ:BABA). The company has $120 billion in cash to deploy, it dominates in global mobility with Android. It’s the default search engine for Apple (NASDAQ:AAPL) as well.
The Bottom Line on GOOG Stock
Chief Financial Officer Ruth Porat has been directing Google since joining from Morgan Stanley (NYSE:MS) in 2015. She recently joined the board at Blackstone Group (NYSE:BLK), giving her a future landing spot and visibility into global capital flows.
Every king’s crown hangs heavy, and Google’s is no exception. In just 23 years, it has gone from start-up to global dominance. Critics see the power of its opponents. Investors should be aware of its own growing power, political as well as financial.
If I were investing with a 10-year time horizon, I wouldn’t fear Google stock here. Everything is overpriced right now. But with the Chinese as the alternative, the Cloud Czars won’t be taken down.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN,MSFT, AAPL, FB and BABA.