Why Google is missing out on the tech rally

Posted at 9:53 AM, Jul 10, 2019
and last updated 2019-07-10 11:53:31-04

Google got rid of its “don’t be evil” motto last year. For the sake of investors, it may want to try out a new slogan: “Don’t be boring.”

Google parent company Alphabet has become one of the most boring Big Tech companies on the market, to the detriment of its stock. Alphabet shares are up about 9% this year. That’s not awful of course, but the stock is lagging the rest of the so-called FAANG stocks in a major way.

Facebook is up more than 50% so far in 2019. Apple and Amazon are up about 30% while Netflix is up more than 40%.

Alphabet has fallen behind the broader market too. The S&P 500 is up about 19% while the Nasdaq has surged nearly 25%. What’s more, Alphabet shares are actually down nearly 4% over the past 12 months.

Why has Alphabet underperformed?

Is Alphabet “old” tech or “new” tech?

Revenue growth has slowed. Concerns about more tech regulation in Washington could also hurt its YouTube unit.

Many of Alphabet’s non-core businesses continue to lose money, leading to worries that the company is a one-trick pony named Search. Its non-core businesses include its so-called Other Bets companies, which include self-driving unit Waymo, life sciences subsidiary Verily and drone delivery service Wing.

And perhaps the company’s biggest problem: It’s hard to figure out if Alphabet is still a high growth momentum stock or a mature old tech firm.

Alphabet’s earnings are expected to grow about 14% a year, on average, for the next few years. That’s certainly still respectable but it’s lower than the projected growth rates of more dynamic companies like Facebook, Amazon and Netflix.

So it might be time for Alphabet to start paying a dividend like Microsoft, Apple, IBM, Cisco and other tech companies. It clearly can afford to do so. Alphabet ended the first quarter with a whopping $113.5 billion in cash on its balance sheet.

But the company probably doesn’t want to throw in the towel and admit it has nothing better to do with its cash. Facebook, Amazon and Netflix don’t pay dividends.

Alphabet did not have a comment for this article, instead referring CNN Business to the portion of its most recent annual report in which the company reiterated that “we have never declared or paid any cash dividend on our common or capital stock. We do not expect to pay any cash dividends in the foreseeable future.”

Why Alphabet stock could stage a comeback

Some of the worries that have held the stock back may be overdone.

The company’s recent push to promote new advertising tools for professional content creators could be good news for Alphabet, said Nomura Instinet analyst Mark Kelley in a report Wednesday.

Ads on the YouTube channels for big media companies have higher rates and are considered “brand safe” for marketers, Kelley argued.

Alphabet’s plans to feature ads on Google’s relaunched news feed — called Discover — on the Google mobile home page could also be attractive to marketers given that the ads could reach up to about 800 million users worldwide, Kelley said.

Alphabet will report its second quarter earnings on July 25. If the company allays some of the concerns about a slowdown in its sales and earnings, then the stock could finally start performing as well as the rest of the FAANG companies.

Breakup fears may be overdone

Investors shouldn’t be too concerned about Alphabet being broken up — or even severely penalized — by US antitrust regulators, said Jefferies analyst Brent Thill.

“US regulators focus on ‘consumer welfare’ so it might be hard to argue that lower prices or better products are hurting consumers,” Thlll wrote, even though some argue that Alphabet and other big techs may be harming smaller rivals.

Even in the unlikely event that tech giants were broken up, Alphabet could still wind up doing quite well, Thill added.

“Breakups are not always a bad thing for stocks,” he wrote, adding that the sum of the various parts at Alphabet could even be higher than the firm’s current combined value.