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Can Alphabet’s share price stage a much needed comeback?

Alphabet's [GOOGL] share price has taken a 18.65% dive since it released its mixed bag of first quarter results on 29 April, suggesting investors are hesitant to buy shares in the tech conglomerate. It posted weaker-than-expected revenue growth of just 17% from the same quarter a year earlier and slowing growth in its ‘Google other’ segment.  

As Alphabet struggles to recover from May’s slump, the share price took another hit after The Wall Street Journal reported that the US Justice Department was readying an antitrust investigation against Google and its search practices. As a result, shares dropped 6.6% to $1038 on Monday – the biggest intraday decline since 30 April and the lowest it’s been since January.Alphabet's 1-year share price performance, CMC Markets, 05 June 2019

 

This isn’t the first time Google has been confronted with antitrust challenges. In Europe, three major cases were brought against the Alphabet business, including how it ranked shopping comparisons sites in search results, requirements for how customers use its display ads and its practice of requiring phone makers that use Android software to preload Google apps. 

During these cases, Google’s representatives formed a solid antitrust defence that proved successful – but in the US, such arguments may not produce the same results.

Evercore ISI analyst Kevin Rippey wrote in a note on Monday that the investigation could bring further trouble to investors, as Android and the Play Store haven’t been “pressure tested in a precedent US-led investigation, adding to the complexity of assessing the spectrum of outcomes”. 

“While precedent suggests that Google enjoys broad discretion over the direction of search results, the questions arising from an investigation will challenge the possibility of multiple expansion,” Rippey added, who trimmed his price target on the stock from $1250 to $1200.

“While precedent suggests that Google enjoys broad discretion over the direction of search results, the questions arising from an investigation will challenge the possibility of multiple expansion” - Evercore ISI analyst Kevin Rippey

 

Prevailing strength in core businesses 

May’s lacklustre stock performance also suggests that investors aren’t convinced of Alphabet’s plans to diversify revenue streams away from its core reliance on advertising. The company has been deploying capital into the development of driverless cars, artificial intelligence and biotech, as CEO Larry Page sets his sights on future innovation. But given this quarter’s miss, investors have turned cautious.  

Despite the concerns, Alphabet’s largest grossing businesses – mobile search, YouTube and the cloud – still provide sizeable opportunity ahead. For example, although profit margins are not disclosed for its YouTube business, Alphabet’s chief financial officer Ruth Porat highlighted it as a strong contributor to its growth, second only to Alphabet’s core business, its mobile search unit.

 

Market cap$720.50bn
PE ratio (TTM)26.01
EPS (TTM)39.86
Return on equity (TTM)16.26%

Alphabet share price vitals, Yahoo finance, 05 June 2019

 

YouTube’s solid performance was partly due to the Super Bowl’s reputation for high-quality and engaging video adverts, as an increasing number of users went to the platform to view the ads. Google CEO Sundar Pichai said during the earnings call that viewership of Super Bowl ads on YouTube rose by nearly 60% in the quarter, solidifying the platform as a “go-to destination for watching Super Bowl ads”.     

60%

Rise in the viewership of Super Bowl ads on YouTube in the MRQ

As one of the most profitable companies in history, Alphabet’s business model has proven resilient but with a new antitrust probe hanging over its head, its stock could be set for some turbulence.

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