Why Is Google Stock Down After Earnings?

Google StockGOOGL Stock Price Takes a Hit

Just as Alphabet Inc (NASDAQ:GOOGL) neared the $1,000 mark, investors had a change of heart about the search giant. They knocked Google stock (GOOGL) down more than 2.5% after the company announced second-quarter earnings.

Why, though?

Google may be a gigantic tech giant, but it still manages more than 20% top-line growth each year. There aren’t too many companies that can brag about that kind of growth, especially if they are also profitable. Most companies burn bright and fast.

But GOOGL stock is clearly not a flash in the pan. It is one of the most consistent performers on the stock market, continually moving up and to the right.

More to the point, Google has the resources to buy growth. It started a highly active venture capital firm in 2009 called, unimaginatively, Google Venture Capital. GV has invested in more than 300 startups that could become the next mega-cap stock.

Even at a one-percent success rate, Google is poised to get rich from the next era of technology giants, just like Yahoo! Inc. did with its early investment in Alibaba Group Holding Ltd (NYSE:BABA). The most valuable part of Yahoo! was its stake in BABA stock.

Since Google is an early investor in Uber, Cloudera, Slack, Stripe, and Udacity, I think it will have a similar tailwind. But even if you push all this to the side, Google is still growing rapidly.

Its 21% revenue growth in the last quarter was purely advertising-based. “Search” and “YouTube” were the biggest chunks of the pie, although I can’t say specifically how much each one represents. Google doesn’t break down its advertising revenue by product.

But according to independent analysis, YouTube would be “worth at least $75.0 billion” if it were an independent company. It is an absolute behemoth.

Why Is Google Stock Dropping?

From time to time, investors lose faith in Google stock. If you look at the GOOGL stock price chart below, you’ll notice that it slowed considerably between 2005 and 2007. That is because investors believed Google stock had plateaued.

They were wrong.

In the aftermath of the 2008 financial crisis, everyone took a fresh look at market valuations. All companies with extra fat took a hit, as did overhyped startups with no road to profitability.

But companies like Google prospered. The market was once again in love with strong fundamental performance, consistent growth, and sizeable earnings. With these metrics at the top of the priority list, it was easy for Google to rack up 540% returns.

google stock chart

Chart courtesy of StockCharts.com

That said, the market is losing faith again.

Investors believe that Google’s fundamentals will weaken over the next few years (despite the fact that it beat expectations this quarter). They are also upset at Google’s $2.7-billion penalty from the European Union’s competition bureau.

As you might remember from a few weeks ago, the European Union decided (in its infinite wisdom) to charge Google with the crime of being successful. Perhaps that’s not exactly how they worded it, but that’s effectively what the charges amount to.

The EU’s competition bureau fined Google $2.7 billion—that’s billion with a “b”—for leveraging its monopoly in the search market. They allege that Google prioritized its own Shopping network over rivals.

While this is technically true, Google insists that its Shopping section is explicitly labelled as “promoted content” and therefore doesn’t have to be neutral.

It’s not as if Google eliminates the competition’s results. Amazon is doing just fine regardless of whether Google take priority or not. But that’s besides the point.

Google has an obligation to keep search queries neutral, because we all rely on its neutrality, but anything beyond search is fair game. And since promoted content does not interfere with the integrity of search results, the bureaucrats in Brussels should leave Google well enough alone.

Apparently Google’s lawyers agree with me, because they are appealing the ruling. Either this means Google won’t pay the fine, or that they will use the appeal as leverage for ending two other investigations in Europe.

As for Google’s fundamental strength, I think investors are overthinking it. They point to the fact that Google makes more money from desktop advertising than it does from mobile as a sign its gross margins will drop. I’m not buying it.

People made the same argument about TV to online advertising. Yet we’ve seen the cost of TV ads drop and the value of online ads increase. Markets find their level, dear reader, so I wouldn’t worry about those issues too much.

Conclusion

The crucial factor is that Google maintains its monopoly on search while building out new revenue streams. Since the company is doing that so well with Waymo and DeepMind (its sister companies for driverless cars and artificial intelligence, respectively), I remain optimistic on the stock.

The specific complaints are different, but I recognize the same disbelief that a company this big can’t be this good. It’s so much easier to believe that Google is going to slow down. But I don’t think that is true.

I think the Google stock price will continue to climb past $1,000, $1,500, and even $1,7500. In fact, I would not be at all surprised to see GOOGL stock hit $2,000 at some point in the next decade.