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Alphabet Stock Suffers from Having Too Much of Its Value Locked Up

Will Healy

Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) has become range-bound. Google stock has failed to gain traction over the last year. Despite double-digit profit growth, lawsuits and privacy concerns have left Alphabet stock unable to gain traction.

Alphabet Stock Suffers from Having Too Much of Its Value Locked Up

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To be sure, the company continues to innovate. Although it still derives the majority of its revenue from ads, many of its outside ventures look poised to drive growth. However, this has failed to translate into gains for GOOGL stock. As long as GOOGL continues to struggle with the ever-increasing number of data privacy breaches and lawsuits, Alphabet stock will suffer along with it.

Alphabet Struggles Despite Innovations

Investors have become the most prominent victims of these accusations. The most recent example of this failure to gain traction came after a 9.6% one-day surge following its last earnings report. The current GOOGL stock price stands at just over $1,200 per share, about the same price where it traded this time last year.

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I have criticized Alphabet in recent articles for locking up the value of its various companies. Many point to Waymo, Google’s self-driving car unit. Estimates of the value of Waymo by itself have reached as high as $250 billion. Alphabet overall supports a value of $837 billion. It makes little sense for Waymo to make up 30% of the company’s value when 86.4% of company revenue comes from ads.

Both I and others have also suggested using some of its $121 billion cash hoard to pay a dividend. I do not think the promise of $25 billion in stock buybacks has benefitted investors as much as dividend payments would.

However, despite my criticisms of the company, it will likely remain an excellent long-term investment. As our own Luke Lango states, Alphabet stock serves as the backbone of the internet and also offers what he calls “tangential growth drivers,” such as Waymo.

GOOGL, Legal Scrutiny and Lower Multiples

Still, in the short-term, it faces challenges. These obstacles have become serious and will probably hamper the stock for the foreseeable future.

As most know, Alphabet faces an antitrust probe from the Department of Justice (DOJ). The Federal Trade Commission (FTC) also fined the company $170 million for breaching the privacy of children. However, the Washington Post now says that more than half of state attorneys general will pursue separate antitrust suits against Alphabet.

Many have become wary of the power of Silicon Valley. Consequently, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Facebook (NASDAQ:FB) also face antitrust scrutiny.

No doubt this has weighed on Alphabet. The forward price-to-earnings (PE) ratio now stands at around 21. This comes in well below the average PE ratio of about 34.2 that the stock has seen over the last five years. Estimated profit growth of 11.6% this year and 14.4% in fiscal 2020 indicates that GOOGL stock trades near its fair value.

A Rescue Plan for Alphabet stock

The lawsuits and accusations of privacy breaches likely explain why the premium has disappeared. However, these actions only make it more critical that Alphabet unlocks more of its value.

The irony is Google locks up so much of its value that a forced breakup would probably boost the various equities that now comprise Alphabet. The sum of the parts would become so much larger than the whole.

Barring that, spinoffs could motivate traders to buy more stock. The company has long served as a wellspring of innovation. It needs some of these innovations to bring profit growth as competition heats up in the ad market. With the lawsuits, it also needs revenue sources less dependent on data privacy.

As I have stated in the past, they could also pay a dividend. The company has tried to help investors through buybacks. However, removing shares from the market does not necessarily result in higher stock prices. The dividend returns cash to investors. It also makes GOOGL stock attractive to income investors who have eschewed the equity.

The company will get past these lawsuits one way or the other. However, if they got past this issue in the marketplace rather than the courtroom, it would better serve holders of Alphabet stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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