Why I Still Don’t Own Alphabet

Just a week ago investors were worrying Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stock had fallen and might not get up. As trading opened on April 2, all was forgiven. GOOG stock was due to open at $2,137 per share, an all-time high. In just five trading days, GOOG stock was up $100 per share.

Alphabet (GOOG,GOOGL) sign reading Google inside building

Source: Benny Marty / Shutterstock.com

What changed? Very little. Google has the same advantages in search, infrastructure and video, it has had for years. It has the same pain point, the cost of growing Google Cloud, it had last year.

What has changed is the market’s view.

By the Numbers

During 2020 Alphabet earned $56.9 billion in the fourth quarter, $54.92/share, on revenues of $182 billion. Revenue was up 13% from 2019, earnings up 11%. The company’s earnings release was frank about the cause of slowing earnings, a $5.6 billion loss on Google Cloud. Cloud nevertheless grew revenue 46%, or $4.1 billion, to $13.06 billion.

You can look at that glass as half-full or half-empty. It’s good to grow 46%, but if you lose $5.6 billion to get $4.1 billion in new business, that’s not good. Google did gain cloud market share, according to Synergy Research. But Microsoft (NASDAQ:MSFT) gained a lot more, and made money doing it.

On the other hand, the earnings release also broke out fourth-quarter revenue for Google Services. This showed a 46% gain in YouTube ads, to $6.9 billion for the quarter. The video ads represented 46% of Google Search’s revenue gain, and that’s the profit engine. Google Services brought in $9.7 billion more revenue during the fourth quarter than in 2019, while spending rose less than $2 billion, and YouTube was the fastest growing part of that.

Antitrust Crime Prevention

To keep the golden goose churning out those golden eggs, Alphabet must keep skeptical regulators at bay.

It’s doing this by replacing third party “cookies.” These are tiny files that track your activities around the Web. The replacement is called Federated Learning of Cohorts (FLoC). This will still let companies target ads very narrowly, by age and location, but won’t let them identify individuals.

It’s part of the “privacy war” now going on among the Cloud Czars, the five companies that own the key cloud infrastructure of the Web. Apple (NASDAQ:AAPL) claims to be on the side of privacy. Facebook (NASDAQ:FB) says ending tracking threatens “the free Internet.”

But all is not as it seems. French regulators are already throwing shade on Apple’s privacy claims. It’s all part of an ongoing battle to see how much of the cloud’s wealth governments might claim, and how much power the Cloud Czars will retain. It’s this battle that should drive your view of Alphabet stock.

Assets are Protection

To maximize its claims, Alphabet is spending big on infrastructure.

Undersea cables once built by phone companies like AT&T (NYSE:T) are now being built by the Czars.  Alphabet had a capital spending budget of $22.3 billion last year and should spend about that much this year. 

The Bottom Line on GOOG Stock

Google remains an expensive stock. It is selling for 36 times last year’s earnings, and about 7 times revenue. The justification is that it’s still growing by 13%, at scale, with 2020 revenue $20 billion ahead of 2019. Every one of the 31 analysts covering Alphabet at Tipranks rate it a buy, with a one-year price target 8% ahead of its current price.

Despite all this, Alphabet is still only the fourth most valuable stock. Apple, Microsoft and Amazon are all worth more, and all are growing faster. So is Facebook, in fifth.

That’s why I don’t own GOOGL.

At the time of publication, Dana Blankenhorn directly owned shares in AAPL, T, MSFT, FB and AMZN.

Dana Blankenhorn has been a financial 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. Follow him on Twitter at @danablankenhorn 


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