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I last addressed Alphabet (NASDAQ:GOOGL) in 11/2021’s “Alphabet: Simple As ABC, Best Stock Ever, Buy On Upcoming Headwinds” (“Simple As ABC”). The underlying premise of Simple As ABC appeared at the article’s outset, Alphabet:
…is one of the top stocks ever with a bright future, and … headwinds out of Washington and elsewhere will be your ticket to a better price over the next few quarters.
At the time it was trading at just under $3,000. The headwinds turned out to be a bit gustier than I had imagined. As I write on 05/30/2022, Alphabet is trading ~$2,246. In this article I address its current travails and assess its future prospects.
According to the Congressional Budget Office [CBO], the last several quarters have seen the highest pace of inflation in four decades. Inflationary pressures have resulted in fed tightening with rapid interest rate increases. This unfavorable economic environment knocked Alphabet’s price back to a more manageable level as shown by its price chart below.
Alphabet’s current 05/30/2022 price of ~$2,246, bouncing off its near term 05/24/2022 low of ~$2,044, is more palatable than its 02/02/2022 peak >$3,000. It is still not a “cheap” stock. Its Seeking Alpha Quant value rating of “D” (05/27/2022) underpinned by its value metrics shown below, tells the tale:
Seeking Alpha Quant Valuation metrics (seekingalpha.com)
Alphabet scores below its communication sector peers in all but three of its metrics. Its PEG ratios, which add growth considerations onto to its PE ratio, stand out. They make up rare individual metrics which are a tad better than their communications sector peers.
Beyond such comparative considerations on specific metrics, Alphabet’s final two columns, its 5-year average and the percentage difference columns are quite enticing across the board. When comparing today’s Alphabet to its average metrics for the last five years, today’s stands out showing how today’s price is truly exceptional.
Does that mean a price of ~$2,246 is a good entry price? Before making that decision consider Alphabet’s upcoming challenges.
Investors received fair warning during Alphabet’s Q1, 2022 earnings call (the “Call“) that Alphabet expects several obstacles to sully its Q2 earnings. There are the usual suspects in this regard; certain issues will likely arise on numerous earnings calls over the next few quarters.
Alphabet has also warned about other predictable impingements to its Q2, 2022 earnings. Despite the cost, Alphabet has responded appropriately to Russia’s aggression in Ukraine. It has shut down the “vast majority” of its commercial activities in Russia. Russia accounted for ~1% of Google’s revenues in 2021.
Another Alphabet specific issue relates to its 2021 US launch of its TikTok response, YouTube Shorts. Alphabet discussed YouTube Shorts at length during the Call. CBO Schindler described its development as follows:
… Shorts went global, rolled out to over 100 countries, and … now has 30 billion daily views, which is 4x higher than a year ago. … we’re taking a fresh look at what it means to monetize Shorts and reward creators for their short-term videos. The first step, I think, is our $100 million YouTube Shorts Fund, which is now available in over 100 countries globally. And over 40% of creators who will receive payment from the Shorts Funds in 2021 weren’t in the YouTube Partner Program, just as an interesting number.
YouTube Shorts is an important developing project embedded within Alphabet’s YouTube ecosystem. Its monetization strategies are a work in process. In response to a question during the Call, CFO Ruth Porat advised:
…we’re experiencing a slight headwind to revenue growth as Shorts viewership grows as a percentage of total YouTube time. We are testing monetization on Shorts, and early advertiser feedback and results are encouraging. And the team is focused on closing the gap with traditional YouTube ads over time. So we’re excited about the new opportunities with Shorts, but a slight headwind.
Befitting its position as a preeminent growth company, Alphabet’s capital expenses have been increasing. Its capital expenditures for Q1 reflect closing on an aggregate of $4 billion in office properties in purchases in New York, London, and Poland. Additionally, capital expenses will show meaningful increases for the balance of 2022. These will reflect “investments in technical infrastructure globally with servers as the largest component”.
Alphabet’s prodigious reach across the full range of internet advertising both ensure its earnings and its status as a preeminent target from regulators and competitors. The European Community (EC) has been particularly active in this regard as a pattern of activity has developed as revealed by Alphabet’s latest 10-Q.
It started in 2010 with investigations by the EC’s Directorate General for Competition into various antitrust-related complaints. In 2017, the EC issued a $2.7 billion fine on a complaint over Google’s display and ranking of shopping search results. Alphabet responded with a variety of appeals and modification of its business to comply with the complaint. It has lost at every level with its most recent 01/2022 appeal to the European Court of Justice still outstanding.
In 07/2018 the EC struck again. This time it assessed an initial fine of $5.1 billion because certain provisions in Google’s Android-related distribution agreements infringed European competition law. Again, Alphabet modified its practice and appealed.
In 03/2019 the EC acted still again; this time it imposed an initial $1.7 billion fine. This third bite was because of its determination that contractual provisions in Google’s AdSense for Search partners agreements infringed European competition law. These fines are all under appeal. Alphabet has:
…included the fines in accrued expenses and other current liabilities on [its]… Consolidated Balance Sheets as [it]… provided bank guarantees (in lieu of a cash payment) for the fines.
The US Department of Justice [DOJ] and various state attorney’s general have joined in with a variety of antitrust investigations and complaints. While regulators have acted on the basis of existing laws. Compliance with existing law is not Alphabet’s only concern.
Both the US Senate and the EC have initiated tough new legislative efforts. A bipartisan group of Senators, several with presidential aspirations, have introduced a bill that would go well beyond existing law. The Competition and Transparency in Digital Advertising Act takes aim at:
…companies processing more than $20 billion in digital ad transactions annually from participating in more than one part of the digital advertising ecosystem.
It is one of several bills designed to limit big tech companies from taking unfair advantage of their massive scale. Even more aggressive initiatives are working their way through the EC. In 04/2022, it approved the Digital Services Act [DSA]. This regulation requires big tech companies to report details on efforts to combat misinformation and to prevent criminal activity on their services.
The DSA will start to take effect in 2024. The EC is working on an even more draconian program targeting “unfair market dominance”.
So far in this article I have mostly addressed Alphabet’s hurdles. They are significant to be sure. However, as I argue in Simple As ABC, its positive performance to date and best quality businesses compel investors to consider how to include it in their portfolios.
As discussed above Alphabet is on sale compared to its historic share price. Despite this drubbing of its shares, its business remains highly profitable. Consider its A+ quant rating for profitability. This is backed up with five of 12 A+’s in its sub-metrics.
Its final profitability metric column compares its current percentage difference in profitability metrics to its 5-year average. This proves that its current performance is not just a historic artifact. To the contrary, current metrics are significantly improved over 5-year averages in all but one case.
As reflected by its price return chart below, Alphabet has massively outperformed compared to the SPDR S&P 500 Trust ETF, even with its recent pullback:
Wall Street Analysts expect Alphabet to continue to excel as reflected by Alphabet’s strong buy rating and by price targets as shown below:
Alphabet is truly an exceptional stock. As discussed, it has its risks, however its potential as the doyen of the internet so far outstrips these that it deserves a place in every investor’s portfolio.
Alphabet is trading at a rare discount to its recent price range. I will repeat my closing paragraphs to Simple As ABC with modifications in bolded italics to reflect Alphabet’s price today, ~$2,246, compared to its then price of $2,994.92:
When deciding on an investment, there are no perfect choices. In terms of business quality, Alphabet is as close as they come to being the best. … [T]oday’s [discounted Alphabet] market, [provides an opportunity to build an Alphabet position at a favorable price].
Making the move requires careful consideration of one’s objectives, time frame and of one’s portfolio mix. For me, my choice is to include Alphabet as a top holding in my portfolio. Wherever you find yourself, Alphabet is worth a look.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may buy or sell interests in any company mentioned over the next 72 hours.