In 2017, tech giant Alphabet Inc. (NASDAQ:GOOGL) saw its share price rise 33.8% over the course of the year and while that’s nothing to sneeze at, it doesn’t come close to the more than 50% growth that its peers like Facebook Inc. (NASDAQ:FB) and Amazon.com Inc. (NASDAQ:AMZN) delivered. GOOGL stock has lost some of its luster over the past year as worries about stagnation in advertising growth weighed on investor sentiment.
The majority of Google’s revenue comes from advertising revenue- 89% of of its revenue to be exact. That’s a scary prospect because it means that GOOGL will need to continue to grow advertising dollars in order to support its $733.46 billion market cap.
Advertising Issues for GOOGL
Google is facing two major headwinds when it comes to continuing to build out its advertising business. The first centers around its video streaming platform YouTube.
On one hand YouTube has become a vastly popular streaming site that has the potential to bring in a great deal of advertising revenue, especially as people turn away from traditional cable and marketing budgets shift their spend to streaming.
However, YouTube has been under fire recently because of ad placement issues and inappropriate videos sporting major brands’ ads. No big brand wants to be associated with hateful content or controversial videos, and these problems have led to companies like Hp Inc. (NYSE:HPQ) reconsidering their spending on YouTube advertising.
Google is working to resolve the problem by hiring new reviewers that will keep an eye on content and ensure that ad placement is relevant, but that comes at a lofty cost. Not only will Google have to pay a premium to make the site safer, but because of the nature of the videos on YouTube- user created- there’s no guarantee that extra vigilance will completely eliminate the problem.
The second thing plaguing GOOGL has been the ongoing shift in the way people view online content. New ad-blocking software can render some of Google’s advertisements useless and as companies like Amazon gain traction as product research tools, Google will struggle to maintain its stronghold in the online advertising space.
Digital advertising revenue growth is expected to slide in the coming years and the question is whether or not Google will be able to make up for that loss with some of its other businesses.
There’s no doubt that GOOGL is hoping to build out some of its other businesses in order to continue to grow its revenue, the question is whether or not those other bets have any real potential to make a meaning impact on the company’s profitability.
Google has been working to build out its cloud computing arm, though because it is lagging behind competitors like Amazon Web Services, it doesn’t get much attention. However the company has been working to entice enterprises to use its cloud platform by offering productivity apps and impressive security features.
Artificial intelligence has been another big bet for Google. The firm developed an open source AI platform that has been used by thousands of brands. AI is expected to be a huge part of some of technology’s biggest up-and-coming trends like Virtual Reality, so GOOGL establishing itself as a top dog in this space is an important step toward the future.
There are tons of other projects that the creatives at Google is working on, everything from healthcare technology to new kinds of wearable devices. And while these so-called “moon-shoots” are exciting, the fact remains that they aren’t profitable and contribute very little to Alphabet Inc’s bread and butter.
The Bottom Line
If you’re looking at Alphabet’s potential struggle in digital advertising, then GOOGL’s stock price probably looks pretty expensive. However, if you believe in Google’s ability to overcome it’s “one-trick-pony” status, then it’s actually a relatively cheap stock.
As fellow IP contributor Luke Lango pointed out, the S&P 500 is trading at a 95% premium to its growth prospects. GOOGL stock is trading at just a 67% premium to its growth prospects. If you believe in said prospects, Alphabet stock is looking like a pretty great bargain.
As of this writing, Laura Hoy was long AMZN and FB.
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