It’s fair to say that Google parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) dominates its tech niche. Indeed, the company so effectively defeats the competition that antitrust actions by governments are a real concern for the owners of Google stock.
Last year, Google stock holders did very well, but some skeptics fear that the good times are about to end. Some of the same regulators that have been hounding Facebook (NASDAQ:FB) have recently set their sights on Alphabet.
I wouldn’t go so far as to say that Google has experienced the same level of scrutiny as Facebook has. Nevertheless, some regulators are quite serious about reducing Google’s industry dominance.
So does this mean that it’s time to abandon Google stock? Taking a deep breath, staying calm and focusing on the facts instead of fears could help us to more effectively evaluate Google’s status amid its legal pressures.
A Closer Look at Google Stock
No reasonable person would claim that Google’s shares are cheap. After all, the stock has traded in the quadruple digits for a long time.
And yet, an argument could be made that Google stock isn’t outrageously overpriced. To drive my point home, let’s make a comparison. Amazon (NASDAQ:AMZN) has a trailing 12-month price-to-earnings ratio of 94. That’s not what I would call a bargain.
In contrast, Google ‘s trailing 12-month P/E ratio comes in at 34. For a technology stock, that’s pretty reasonable.
As far as the price action goes, Google stock bottomed out near $1,000 in March but never came close to that price again. The stock ended the year at $1,752.64 after starting the fourth quarter near $1,500.
So the bulls are currently in control of Google’s price action. But again, there’s a major concern that regulatory threats could derail the stock in 2021.
Here Come the Regulators
As soon as a company gets really big, regulators seem to come out of the woodwork. Sometimes they’ll gang up on a company.
To give you an example of what this looks like, on Dec. 17 it was reported that as many as 38 state attorneys general (led by Arizona, Colorado, Iowa, Nebraska, New York, North Carolina, Tennessee and Utah) filed an antitrust suit against Google.
A couple of months earlier, the U.S. Department of Justice, joined by 11 states, had filed a similar antitrust suit against Google.
These lawsuits all pretty much make the same allegation: Google is stifling competition in order to maintain its dominant position in online search and search advertising.
Texas Attorney General Ken Paxton is practically turning his state’s case against Google into a crusade. “These actions harm every person in America… If the free market were a baseball game, Google positioned itself as the pitcher, the batter and the umpire,” Paxton declared.
A Favorable Outlook
Here’s how I view the situation. If being too big and powerful is Google’s worst problem, then that’s a pretty nice problem to have.
In 2019, Google generated nearly $135 billion in total advertising revenue. Astoundingly, nearly one out of every three dollars spent on digital advertising goes to Google.
Moreover, Alphabet generated a whopping $34 billion in profits in 2019. That’s almost a 12% year-over-year increase. In Q3 alone, Alphabet posted $11.25 billion in earnings, a vast improvement over the $7.07 billion recorded in the same quarter a year earlier.
For his part, Robert W. Baird & Co. analyst Colin Sebastian isn’t fretting about the regulatory threats. He maintained an “outperform” rating on Alphabet and assigned it a price target of $2,000.
Sebastian models a “favorable outlook for 2021” for the company, and he doesn’t expect “game-changing” regulatory penalties to be imposed on Alphabet.
The Bottom Line
As you can see, Sebastian is keeping a cool head and counting on Google stock to stay on track despite the regulators’ threats. That’s a reasonable stance to take.
It’s not always easy to be the biggest fish in the pond, so to speak. But if that’s Google’s worst problem in the online search and search advertising marketplace, then Alphabet should remain highly profitable over the long-run.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
