On the surface Alphabet (NASGAQ:GOOG,NASDAQ:GOOGL) looks like a rock-solid investment. Google stock is up 29% in 2020. The market cap is now $1.16 trillion. That’s not out of line for a company with revenue of $161 billion last year, growing 17% a year at scale. The most recent quarter even saw sales growth of 21%.
But look under the hood. Of all the cloud czars, Alphabet had the worst performance in 2020. Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) are both up 70%. Microsoft (NASDAQ:MSFT) is up 38%, from a higher base. It’s now worth 42% more than the House of Google. Even Facebook (NASDAQ:FB), the czar everyone loves to hate, is up 34%.
If a czar can’t make bank in this environment, there’s trouble in River City. I believe there is. It starts with T, gotta rhyme it with P. That stands for Porat.
The Morgan Stanley Way
Alphabet CFO Ruth Porat is the power behind the throne at Google. Sunder Pichai has the CEO chair. Porat controls the money.
Porat was recruited a half-decade ago from Morgan Stanley (NYSE:MS), and she brought its ways west with her. Those ways aren’t Silicon Valley’s ways.
The Silicon Valley way is to innovate, to invent something no one imagined before, then support it to the hilt. (Like Diem.) Google was once such a thing. The cloud was once just such a thing.
Google hasn’t invented anything since Porat arrived. She reined in Google’s “other bets” like Waymo and Google Fiber, starving them of capital or demanding bottom line proofs of concept. Even great ideas like Verily must raise outside capital. Its best ideas are already mired in internal politics.
Wall Street has applauded.
Wall Street is stupid.
Too much of what Google does today is second rate. Android is second-rate. Google’s office applications are second rate. Its cloud is growing, but no faster than the market. It still trails Microsoft and Amazon, badly. Its speakers, streaming stick and voice interface are all copies of Amazon products, and not very good ones. There is nothing on its new products page you can’t get elsewhere, either for less or better.
Cops Are Coming
Wall Street likes monopolies. They buy them, extend them, extract capital from them. This isn’t the Silicon Valley way either.
Google has a virtual monopoly in search. Porat has run it in a Wall Street way, extending it and extracting capital. Alphabet had almost $120 billion in cash on its books at the end of September. What’s Porat doing with it?
Meanwhile governments, which don’t like monopolists who only exist to satisfy themselves, are coming after her. The Department of Justice filed the same kind of suit it filed against Microsoft in the 1990s. Google is accused of abusing its monopoly in online ads, in collusion with Facebook. Theorists are talking of busting up its web crawler. Europe is threatening to break up all the czars because it can’t compete with them.
The suits may not go anywhere. Google can probably get away with fines and promises to behave. But those promises will inevitably require it to hire a lot of lawyers and mavens whose job it is to say “no.” I’ve seen this movie before. Until Microsoft got the government off its back, it was hobbled in just this way. Shareholders suffered.
The Bottom Line
Right now, Google stock is the only one of the cloud czars I wouldn’t buy.
The company is playing defense. It’s playing the way Wall Street wants it to play.
Over 20 years ago I watched Wall Street destroy a similar company. Analysts called search over-rated, said the company should go on an acquisition spree, and become a “portal” to the internet. CEO Tim Koogle complied.
The company was Yahoo.
My advice is to let Google be Google. Run it like a Silicon Valley company. Let Porat count the money, but that’s all. The signs and portents right now are very bad.
At the time of publication, Dana Blankenhorn had long positions in AAPL, MSFT and AMZN.
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 email@example.com or follow him on Twitter at @danablankenhorn.