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Alphabet Inc Is Running on Autopilot, Which Should Worry You

Dana Blankenhorn

Google remains the greatest money-making machine in the history of the world, but it’s on autopilot. The search engine owned by Alphabet Inc (NASDAQ:GOOGL) churned out $6.732 billion in profits during the third quarter of 2017, on revenue of $27.772 billion. It delivered nearly $27 billion in operating cash flow, adding to a debt-free cash hoard of over $100 billion, which seems to fully justify a market cap of $718 billion, up 31% for the year so far.

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Amazon.com, Inc. (NASDAQ:AMZN) may have to ship things and Apple Inc. (NASDAQ:AAPL) may have to make things, but Google’s cloud continues merrily on, churning out cash automatically as people use it.

But is it still a good investment?

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Another 30% gain will bring Alphabet’s market cap over $1 trillion. It still pays no dividends, and its “other bets,” like Waymo self-driving cars and Google Fiber broadband, are no longer getting heavy investment under the firm hand of CFO Ruth Porat.

Google Is Fat and Happy

The future of Alphabet depends on global demand for mobile search that seems insatiable, and a Google Cloud platform that continues to hold potential but also continues to trail rivals like Amazon and Microsoft Corporation (NASDAQ:MSFT).

What most InvestorPlace writers seem to be saying right now is to “buy the dip,” meaning it’s awfully pricey but we sure would love it if it were just a little cheaper.

The October “opportunity” seen by Will Ashworth consisted of a brief dip below $1,000 per share, but at its opening Nov 15 price of $1,033 per share you’re paying over 34 times earnings for $104 billion in revenue and $32.44 per share of net income. And you’ll only save $7 on the non-voting GOOG shares.

The post-earnings “breakout” seen by Chris Tyler came to about $50 per share, which seems great until you realize it’s just 5% on your money, and that, again, the company continues to pile up cash and isn’t even buying back its stock.

Changing Challenges

The new risks in Google are political, as I noted last month while urging caution to new buyers.

What economist Joseph Schumpeter called “creative destruction” is just what Alphabet and the other big tech stocks are delivering.

In Google’s case, it’s mostly the media industry that is being destroyed, newspapers, magazines and now TV falling to a machine that lets ad buyers slice-and-dice the audience any way they want justifying the inefficiency with bulk purchases. Google is destroying its raw material and putting the money into its own Aladdin’s Cave, while saying and doing nothing.

Money that isn’t working doesn’t really exist. Money is real only when it’s being exchanged for something. It’s a verb. Extracting value while offering nothing in return is a game with a real sell-by date.

The Bottom Line for Google Stock

Google’s cost per click, what it pays to acquire traffic, is rising and it’s being forced to take responsibility for the content it links to, a process that doesn’t scale the way an algorithm does.

This has some savvy tech buyers selling Alphabet in favor of stocks that create their own content, like Facebook Inc (NASDAQ:FB) or deliver real merchandise, like Amazon and Alibaba Group Holding Ltd (NASDAQ:BABA).

The lyric to an old song, “Last Days of Pompeii,” keeps rolling around in my head regarding Google. “My life would be different, my love would be different, if I knew then what I know now.”

There’s a volcano under the company’s feet and no one seems to notice.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AMZN and BABA.

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