On the surface, it may make sense why some investors are bullish on Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) stock, despite its poor performance this year. In time, the macro headwinds affecting the company’s operating performance will fade.
However, on closer inspection, it’s questionable whether an improvement in economic conditions will mean a big recovery for the tech giant’s shares. The road back to its all-time high closing price ($150.71 per share) could be much longer than currently expected.
On an even longer timeframe, this once strong-performing mega-cap stock could deliver more underwhelming returns.
Chalk it up to three factors, all of which will remain in play well after today’s issues like inflation and slowing economic growth are resolved. With this in mind, the stock (at just under $100 per share today) may not be the “can’t miss” opportunity it seems to some.
These 3 Factors Could Limit Future Returns
Even after its extended pullback during the 2022 stock market downturn, Alphabet stock is up 481% over the past decade. That equates to approximately a 19.24% annualized return. Not too shabby.
Given the company’s current size ($1.3 trillion market capitalization), few expect similar gains over the next ten years. However, it’s not a lock that GOOG stock will outperform the overall market over the next decade, as three factors could limit future returns.
First, interest rates, which admittedly are related to the company’s current headwinds. High inflation has led to high interest rates, affecting economic growth and Alphabet’s underlying performance. Yet even after inflation cools off, interest rates may not necessarily return to near-zero levels. This could limit the extent to which GOOG’s earnings multiple (currently at 19.75) re-expands post-downturn.
Second, as Alphabet’s core search advertising business matures. Sure, growth in other segments like cloud computing could outweigh this. However, a third factor (rising competition) may spoil the chances of that happening.
Cost-Cutting Efforts Will Only Go So Far
In my last article on GOOG stock, I discussed TCI Fund Management’s questionable chances of making headway in its shareholder activism campaign with the company. Still, with Alphabet possibly preparing to lay off as many as 10,000 employees, it may appear as if management is taking heed of TCI’s calls for heavy cost reductions.
But while savings from reducing headcount will fall mostly to the bottom line, this alone may have only a short-lived, modest impact on the stock’s future performance. While 10,000 employees is a large figure, Alphabet has 187,000 people on the payroll. This equates to only a 6% drop.
Furthermore, it does not appear likely that Alphabet plans to cave into TCI’s other cost-cutting demands. The activist hedge fund may balk at the company’s high average salaries, yet as it competes with its big tech competitors for top talent, this may be another area where cost-reduction potential is limited.
A trimming of the “Other Bets” division may not be in store, either. While backing out “Other Bets” losses may make Alphabet’s operating performance look stronger, management isn’t likely to trim this division, out of fear of “missing out” on the next big high-growth frontier.
Alphabet’s earnings could pick back up by 2024, per sell-side forecasts, but this may only provide a moderate boost for the stock once current storms pass. Apply GOOG’s current multiple to analyst consensus for 2024 earnings per share ($6.19), and you get a valuation of around $122.25 per share, only moderately above current prices.
Looking further into the future, earnings growth may be limited by the maturing of the company’s search advertising business, and high competition affecting its cloud computing unit. Not to mention, its streaming unit as well, given platforms like TikTok are grabbing market share (and ad dollars) from YouTube.
Before buying GOOG stock after its recent surge, keep in mind future returns may be far less stellar. While shares may not hit new lows, it may be a slow and disappointing trip back to higher prices.
GOOG stock earns a D rating in Portfolio Grader.
On the date of publication, Louis Navellier held AMZN, GOOG and MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.