Should You Buy Alphabet (GOOG, GOOGL) Stock?

THERE ARE ONLY A handful of companies in the world that can argue they have power approaching Alphabet (ticker: GOOG, GOOGL). And ever since its initial public offering in 2004, GOOG stock has performed accordingly.

But 16 years after its IPO the world’s leading search engine isn’t the growth dynamo it once was, and government scrutiny has led to a major antitrust lawsuit that threatens the very core of Alphabet’s business.

In fact, as popular consumer tech products evolve it has become an open question in Silicon Valley whether Alphabet might eventually lose its search mojo.

Here’s a brief overview of the Mountain View, California-based technology giant, its core areas of business, and — most importantly for prospective investors — pros and cons that can help answer the question: “Should I buy Alphabet stock?”

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Alphabet Stock at a Glance

In 2015, Google restructured its business and reincorporated itself as Alphabet, a holding company whose major subsidiary would be Google, the world’s dominant search company. Under the restructuring, investors were able to differentiate the results between the cash-cow Google and its money-losing “moonshot” investments in the “Other Bets” category.

Despite the separation, there’s a reason the company kept its ticker as GOOG: Alphabet is still essentially just a big proxy for its crown jewel, Google.

GOOG stock’s lifeblood is digital advertising, a massive industry that it dominates alongside its rival, Facebook ( FB) — the two companies control nearly 70% of the digital advertising market in the U.S. Google sells ads against its search results for specific terms, and also operates a sprawling ad network, placing ads on third-party sites for a cut of the resulting revenue.

With mobile overtaking desktop as the world’s preferred search platform, Google’s Android operating system becomes ever more valuable; Android enjoys roughly 75% of global market share, and Google is the default search engine for Android — a key point in the U.S. government’s antitrust lawsuit.

YouTube, Gmail, Google Play, Pixel phones, Google Home smart speakers, Google Cloud and the company’s expanding hardware business are a few of the big-name products supplementing Alphabet’s bottom line alongside the search engine; in fact, given macroeconomic headwinds, these side businesses may soon become more important than ever.

As for Other Bets, it accounted for an immaterial 0.4% of Alphabet’s overall revenue last quarter and lost a disproportionate amount of money doing so. In the third quarter of 2020, Other Bets posted $178 million in revenue and an operating loss of $1.1 billion. This is where some of the wacky yet potentially huge long-term projects live, such as Google Fiber, the Waymo self-driving car unit, anti-aging research outfit Verily, a network of internet-beaming balloons and a drone delivery unit.

Pros to Buying GOOG Stock

2020 has been a difficult year for many businesses, and the first thing companies do when money gets tight is cut their advertising budgets — that’s bad news for the biggest advertising platform in the world.

In fact, in the second quarter Alphabet hit a roadblock that shareholders never thought they’d see: its first year-over-year decline in revenue. Alphabet reported $38.3 billion in revenue during the second quarter of 2020, down from $38.9 billion in the same quarter last year — not an enormous loss, but the fact that revenue dropped was a big red flag for investors.

But this quarter the company bounced back better than anyone had expected thanks to a rebound in advertising revenue. In the third quarter of 2020, Alphabet brought in $38.01 billion in revenue after removing traffic acquisition costs, a 14% increase over the same quarter last year. The vast majority of this gain came from advertising revenue, which grew to $37.1 billion from $33.8 billion during the same period last year.

No matter what happens to advertising revenue, Google has firmly entrenched itself as the world’s go-to search site. The search giant controls more than 88% of the U.S. market and more than 92% of the global market share. And for the time being, Android serves as a pretty good insurance policy against other search companies taking significant mobile share. But shareholders must be relieved that Google’s main business seems to be stabilizing.

The second pro to owning GOOG stock, aside from its big-time search engine cash cow and exceptional brand, is the company’s investment in diversification. Its portfolio of products ranges from self-driving cars to YouTube, and from artificial intelligence to cloud and voice search.

[Read: Should You Buy Netflix (NFLX) Stock?]

YouTube is arguably at the epicenter of the consumer transition from traditional mass-market media to dispersed, on-demand and increasingly mobile media consumption. These factors have made their way into Alphabet’s earnings report, with YouTube ad revenue increasing from $3.8 billion to $5.04 billion in the third quarter — an impressive 28% gain year over year. While advertising revenue is Alphabet’s bread and butter, it doesn’t hurt that YouTube Music and YouTube Premium now have more than 30 million paid subscribers combined.

At this point, advertisers who aren’t shifting more of their budget to online video platforms are simply missing out.

Longer term, Google’s willingness to invest in bold new projects outside its core competency as a search engine could be precisely what allows it to continue as a growth stock despite hundreds of billions in annual revenue.

Several promising areas hold the type of game-changing potential that could launch a new era of growth for GOOG shareholders: in particular, artificial intelligence and autonomous vehicles, or AVs. Alphabet’s Waymo subsidiary is already a leader in AVs, and Alphabet’s research and development investments in artificial intelligence have made it one of the best AI companies, too.

A line item dubbed “Google other,” which includes its Pixel mobile phones and Google Play, enjoyed revenue growth of more than 35% in the third quarter to $5.5 billion. According to management, Google Play app and game downloads were particularly strong as people stuck at home hopped on their phones to blow off steam.

Finally, Google Cloud revenue clocked in at $3.4 billion, an impressive 36% increase compared with the same period last year. Like Google Play, Cloud was helped by the worldwide lockdowns this quarter as people were forced to work remotely. Millions of companies used Alphabet’s G Suite of services — such as Gmail, Drive, Chat and Meet — and millions more will continue to use those services as remote work becomes more normalized.

[READ: Should You Buy Tesla (TSLA) Stock?]

Cons to Buying GOOG Stock

There’s nothing Alphabet can do about macroeconomic headwinds, and unfortunately there’s nothing the company can do about the fact that Amazon.com ( AMZN) exists — and is attacking the search giant on all fronts.

Perhaps the greatest long-term risk Amazon poses to GOOG is its encroachment into voice search — which might be the very future of search itself — where Amazon’s Alexa virtual assistant has a huge first-mover advantage that it’s ruthlessly capitalized on.

Amazon is also seizing digital advertising dollars, as marketers shift spending to Amazon.com’s growing platform and more lucrative product searches begin on Amazon than Google. In cloud, Amazon Web Services is the clear market leader, with Google Cloud playing catch-up and occupying a distant third place behind Amazon and Microsoft ( MSFT) Azure. Jeff Bezos’ ruthlessly opportunistic company is also devoting time, energy and resources to AI.

Taken in concert, these trends don’t look particularly good for Alphabet or inspire much confidence in its ability to churn out company-changing profits anytime soon. Amazon beat Google to market by years in smart speakers and cloud computing, GOOG’s Pixel phone has thus far proven unable to dislodge Apple’s ( AAPL) iPhone from its perch, and the company even tried to copy Facebook with its ill-fated and largely ignored Google+ social network, which was finally discontinued after seven ho-hum years.

But the biggest concern investors have regarding Google’s future is regulation.

In mid-2019, news broke that the Department of Justice had opened an antitrust inquiry into the company. Now that investigation has been completed, and the DOJ has decided to move forward with what will be one of the biggest and most closely followed antitrust lawsuits of all time.

The issues are twofold: mobile market share and advertising market share. The DOJ alleges that Alphabet pays massive amounts of money to Apple to keep Google the default search engine on devices powered by Apple’s iOS, preventing other search companies from gaining any market share. Meanwhile, Alphabet’s Android market share is massive, and the default search engine on Android devices is, of course, Google. The combination has given Alphabet an incredibly strong position in mobile search, and the DOJ has deemed these practices anticompetitive.

At the same time, the DOJ doesn’t like that Google handles just under 90% market share of U.S. search queries. This gives Alphabet a monopoly over the search advertising industry, and the DOJ alleges that Alphabet has used its dominance to give its own products priority in search results, among other issues.

As Big Tech comes under the regulation microscope, this lawsuit will be telling for how successful future litigation may be.

Finally, while GOOG stock certainly doesn’t appear grossly overvalued, shares do trade for more than 30 times earnings with no obvious catalyst on the horizon. With slowing global growth and a flat yield curve indicating trouble ahead, the timing doesn’t seem ideal for potential Alphabet shareholders, either.

The Bottom Line for GOOG Stock

No stock is perfect, and Alphabet is no different. But the company does have an incredible competitive advantage in search and works hard to diversify its business for dynamic future growth.

There’s no other company in the world positioned the way Alphabet is, and that’s the most compelling fundamental reason to buy. Yes, Google is entering a new era where regulation could be a major overhang, but keep in mind Big Tech counterparts such as Apple, Facebook and Amazon are also under the microscope. And yes, economic headwinds are blowing against Alphabet right now as advertisers slash their budgets, but with the all-important holiday season fast approaching, Alphabet executives believe that advertising revenue will recover in the near term.

If you’re holding for the long term, though, and want to own one of the most compelling companies in tech, there’s nothing wrong with buying some GOOG now simply for peace of mind and adding more if it pulls back.

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Should You Buy Alphabet (GOOG, GOOGL) Stock? originally appeared on usnews.com

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