It’s the best-performing FAANG stock by a long shot over the past 12 months, but the success of Google parent company Alphabet (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL) could pose challenges going forward. That’s the call from portfolio manager Chris Blumas who feels the regulatory overhang on Google is something investors need to keep their eyes on.
It’s been a heck of a year for Alphabet, which keeps smashing earnings expectations with each quarter. Earlier this year, the company delivered first quarter revenue that was up 34 per cent year-over-year as advertising revenue grew to $44.68 billion. The company proceeded to best that with its second quarter, delivered in late July, where ad sales grew by a whopping 69 per cent from a year earlier to hit $50.44 billion.
The company’s bottom line has been tremendous, as well, hitting $26.29 per share in earnings for its first quarter 2021 and $27.26 per share for the Q2. Both were significant beats of analysts’ forecasts.
“In Q2, there was a rising tide of online activity in many parts of the world, and we’re proud that our services helped so many consumers and businesses,” said Google and Alphabet CEO Sundar Pichai in a July 27 press release. “Our long-term investments in AI and Google Cloud are helping us drive significant improvements in everyone’s digital experience.”
But for Blumas, Google’s share price appreciation is currently a red flag, leaving investors in wait for a better entry point.
“This is a phenomenal business. It’s very, very scalable. This is a name that I do own on behalf of clients, but it’s one that I haven’t been able to buy for a little bit,” said Blumas of Raymond James Investment Counsel, who spoke on BNN Bloomberg on Tuesday.
“I think in terms of it being a great compounder and it having a great long term potential, I think it does. I’m just wary of valuation right now. It’s right up around 30x earnings,” he said.
“In terms of how money has flowed into the US market and how a lot of money has flowed into indexed products, that has really pushed a lot of these large cap tech names and large cap growth names a lot higher, so I would just look to add to Google on a bit of a pullback,” Blumas said.
Alphabet had a relatively quiet year in 2020 compared to a number of other tech companies, returning 31 per cent whereas names like pandemic-friendly e-commerce companies Amazon and Shopify returned 76 and 178 per cent, respectively. But 2021 has so far been quieter for that sector, with Amazon returning just two per cent year-to-date and Shopify at 22 per cent. In the case of GOOGL, the stock has returned 61 per cent year-to-date and a massive 80 per cent since last October.
Growth prospects for Alphabet’s ad business appear to be good, too, as the company has gotten past the pandemic downturn which saw revenue decline on a year-over-year basis in the early months of 2020 before rebounding with a vengeance. The company’s YouTube ad sales, for example, grew by 49 per cent year-over-year for its latest quarter.
One potential wrench in the works for a company like Alphabet is the threat of further action by governments worldwide to stem the power of its platforms, which in the case of its search engine assert a sheer dominance over the internet landscape. The US Department of Justice is currently investigating Google for alleged anti-competition practices related to its search engine and contracts signed with wireless carriers and mobile phone companies.
Claims have been made that Alphabet may one day be forced into a breakup of its businesses along with going through an extensive legal fight much like the one Microsoft went through more than two decades ago.
But Blumas is less concerned about such a scenario, saying that any hesitation on the market’s part should be viewed as an opportunity.
“The one thing that has concerned me — and I don’t know that it will it will destroy value over the long term but it will create some volatility — is the anti-trust [case],” Blumas said. “Relative to some of its tech peers [where] Microsoft had gone through its challenges with regulators in the past, Google is going to go through that at some point. There have been rumblings of it for quite some time now.”
“I think that as that type of regulatory rhetoric ramps up there could be a pullback in the shares and I think that would be a time that I would be more interested in entering. So, for new client accounts this is one that I’m just waiting on and I’d like to give [investors] the same advice. Just be patient and look to add on a pullback,” he said.