Don’t be evil. The old corporate mantra of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) now seems quaint. The House of Google is suddenly beset by critics around the world who see it as the epitome of evil. And this could pose trouble for Google stock.
Despite this, the money keeps rolling in from every side. The company next reports earnings on Feb. 1. Net income of $11.5 billion and $15.63 per share is expected on revenue of $41.85 billion. It might clear that bar since the top line is more than $4 billion short of what it did in the third quarter.
The question for investors is whether that financial power is still worth 30 times earnings.
Troubles for Google Stock
I have become a Google critic in recent months.
I called Google stock overvalued in October. (Since then it’s up 20%, so what do I know?) In December, I blamed Chief Financial Officer Ruth Porat, a former Morgan Stanley (NYSE:MS) executive, for the mess. Silicon Valley companies don’t run well with Wall Street values.
At the heart of Google’s problem is the political power that comes from its search algorithm and YouTube video channel. YouTube uses a common technique, giving people more of what they say they want. When applied to web search, this can lead to a wealth of knitting sites, professional help or fellow cat lovers. When applied to political videos, it can lead down conspiracy rabbit holes.
On a larger scale, Google algorithms can destroy whole industries when enjoyed by billions. Journalists are demanding Google pay for links to their stories, governments are following their chase for money and news may just be the start.
Everything Google does is now subject to government pushback. It has taken over a year to conclude the acquisition of FitBit for $2.1 billion. Google is now doing more startup investments than any big deals. Even simple browser updates are now subject to government regulation.
Google’s Cloud Opportunity
Google has responded by putting greater focus on Google Cloud, where it rents its infrastructure, platform and applications.
It recently opened new regions in Asia, Australia, Europe and South America. Further, Google Cloud revenues are now growing faster than at Amazon (NASDAQ:AMZN) or Microsoft (NASDAQ:MSFT), although its market share still trails badly.
Even here there are problems. A December outage showed clouds are “not invincible.” Artificial intelligence, a key cloud niche, is at the heart of its labor troubles, after ethicist Timnit Gebru left.
Security costs are climbing, with new threats, like one targeting Google’s security key, emerging regularly. All Google services, free and paid, now have targets on their backs. This may be why Google is starting to pull back, closing its machine internet operating system, Android Things.
The Bottom Line
Companies earn fat price-to-earnings (P/E) multiples because they deliver superior growth. Google’s has averaged over 25% for five years. Its P/E is still above that of the average NASDAQ stock, which is 26.
Investors must now ask whether that will continue given the political pushback. The company has temporarily halted political donations. Its political action committee spent $1.06 million during the recent election cycle. Additionally, it has suspended President Donald Trump’s YouTube channel and locked Parler, the social app he had recently favored, from its app store.
But this is a global problem. As Shakespeare wrote, “heavy is the head that wears the crown.” Antitrust fights have a way of creating layers of bureaucracy that make responding to market changes impossible.
It’s hard to see Google’s growth rate doing anything but slowing.
At the time of publication, Dana Blankenhorn owned had positions in MSFT and AMZN.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.