Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is one of the largest, most widely followed companies in the market. On Oct. 28, GOOGL released third-quarter earnings that failed to impress analysts. Yet Alphabet stock is still up about 24% in 2019.
In my opinion, it’s not an opportunistic time for long-term investors to buy Google stock yet. This column will examine several short-term risks facing Alphabet stock.
Google’s Results Were Unimpressive
The company’s dominant core business is internet search, and about 80% of its revenue comes from advertising. Over the next five years, analysts, on average, expect its mean annual earnings growth to be almost 18%.
In recent years, Alphabet has undertaken other “moonshot” ventures, such as Waymo, its self-driving car business and CapitalG, its late-stage venture capital arm that could eventually become the next Google.
GOOGL is divided into three main segments:
- Advertising, which mostly consists of search and YouTube and contributes over 80% of its revenue
- Google “Other” ,which mostly consists of its Cloud Platform (GCP) and its app sales and contributes about 15% of its revenue
- Other Bets, which consists of ventures such as Waymo and contributes about 5% of its revenue
In Q3, Alphabet’s profits sank 23% year-over-year as its expenses rose. Although the company’s quarterly revenue increased 20% to $40.5 billion, its profit dropped to $7.07 billion and missed analysts’ average forecast.
Going forward, Google’s digital advertising revenues are likely to continue to be its main profit driver. Therefore, if the segment weakens, GOOGL stock will be hurt. It is no secret that Google has been facing new competition for advertising dollars from Amazon (NASDAQ:AMZN) as well as other companies.
Google is seen as the third-largest cloud computing provider, behind Amazon and Microsoft (NASDAQ:MSFT), When Amazon reported its earnings on Oct. 24, the deceleration of the growth of its cloud business disappointed investors.
Since June, the U.S. Department of Justice has indicated that it’s investigating whether several big tech names, including Alphabet, broke antitrust laws.
Scholars and analysts have long debated the potential impact of the power of large tech firms on consumers. Lina Khan of Columbia Law School stated that a “handful of digital platforms exert increasing control over key arteries of American commerce and communications…As these platforms further concentrate market power, there are rising concerns about their size—usually in reference to the large share that each firm captures of its primary markets.”
As the 2020 presidential contest heats up, antitrust issues are becoming central to several candidates’ campaigns. And for the owners of Alphabet stock, the news and debates related uncertainty.
According to one estimate, Alphabet has a 37% share of the digital ad market in the U.S. Its closest competitor, Facebook (NASDAQ:FB), has about 20% of the market. Therefore, it’s not very surprising that the government is investigating whether they broke antitrust laws.
At this point, it’s hard to know what the ultimate impact of this investigation will be on Alphabet stock. However, investors may sell Google stock now, and ask questions later.
I’m not entirely convinced that GOOG stock fully reflects the potential threat from the government’s investigation. As further information about the probe is reported, Alphabet stock will likely continue to be volatile. If the investigation intensifies, Google stock could fall towards the low-$1200 level.
Charts Indicate That Investors Should Be Cautious About Google Stock
Following the release of the Q3 report, Alphabet stock initially went down. On Oct. 28, GOOGL stock closed at $1,298.88. On Oct. 31, it reached an intraday low of $1,249.48.
However, since then, GOOG stock has recovered and on Nov. 18, it hit a 52-week high of $1,333.92. Now the shares are hovering around $1,300.
Because of the recent impressive jump of Alphabet stock, its short-term technical indicators have become somewhat over-extended. Investors who pay attention to short-term oscillators should note that GOOG stock has become “overbought.”
In the next few weeks, GOOGL stock could trade sideways and even fall toward the $1,270 level. The $1,250 level, where the stock is likely to find major support, could also be in play.
The beta of Alphabet stock is 1.03, which means its volatility is about the same as the stock market’s average. Therefore, if other big tech names or the stock market declines, then GOOGL stock may also take a breather.
I would suggest that long-term investors wait until Alphabet stock builds a base between $1250 and $1270. However, those investors who are able to handle some short-term volatility could use any pullback of Alphabet stock as an opportunity to buy the shares.
Going forward, if U.S.-China trade tensions ease, the Hong Kong protests end, or the Justice Department completes its antitrust probe without seeking to punish Alphabet, then GOOG stock price could rebound quickly.
The Bottom Line on Alphabet Stock
The DOJ’s antitrust probe carries risk for Alphabet stock. The company’s advertising and cloud businesses could weaken, lowering Alphabet’s financial results.
Therefore, investors could wait on the sidelines if they do not currently own GOOGL stock. If they already own Alphabet stock, they could patiently ride out the volatility or they could hedge their positions with covered calls that expire on Jan. 17.
Although Alphabet stock is facing a number of short-term risks, it’s important to remember that fundamentally strong stocks typically recover over time. Thus, long-term investors should not panic and quickly sell Alphabet stock. Moreover, if the shares fall any further, then investors will have a better entry point.
I believe that Alphabet stock is a compelling choice for long-term investors. By the end of 2020, the shares are likely to reach $1,380-$1,400.
Investors who are cautiously upbeat on GOOGL stock could consider investing in various exchange-traded funds (ETFs) that include Google stock. Examples of such funds include the iShares U.S. Technology ETF (NYSEARCA:IYW), the Technology Select Sector SPDR (NYSEARCA:XLK) and the AdvisorShares New Tech and Media ETF (NYSEARCA:FNG).
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.