This Could Be Huge for GOOG Stock
Alphabet Inc (NASDAQ:GOOG) stock doesn’t make news headlines that often, but that doesn’t mean there’s no action. As a matter of fact, Google stock fell 11.4% since it reported earnings a little over two months ago. Considering the company’s giant size, the drop in Google stock has resulted in tens of billions of dollars in market cap simply evaporating.
This shouldn’t come as that big of a surprise. Once a company gets big enough, it’s going to be placed under the microscope. Alphabet Inc, the parent company of Google, is the second-largest company in the world by market cap. Hence, the market is constantly trying to determine whether the search engine giant can support this kind of valuation.
In all honesty, Google runs an amazing business. It created and operates the most widely used search engine in the world, developed the most popular mobile operating system (“Android”), and owns YouTube, the No. 1 video streaming platform in the world.
Yet, GOOG stock’s valuation is not that high. Trading at $680.04 per share, Google stock has a price-to-earnings multiple of 27.67X. If you use its expected earnings for the next calendar year, you’d see that the company is trading just above 17 times its forward earnings.
So, the company is more than solid. But no company is perfect. Judging by the market’s valuation of Alphabet, investors are not as optimistic about Google’s future as they are about other Internet giants.
This doesn’t mean that Alphabet is lacking in growth projects. As a matter of fact, Google created Alphabet, an umbrella company, so that it could separate its core business from what it has dubbed its “Other Bets.” Alphabet’s Other Bets segment includes projects such as driverless cars, “Google Fiber,” “Verily” (formerly “Google Life Sciences”), and smart home systems producer Nest Labs.
The problem is that many of those projects are burning a lot of cash and are quite far away from being profitable. At the same time, with its core business already established, is there any way for the multinational conglomerate to find new sources of growth in the near term?
I believe the answer is yes, and the key to this growth lies in social media.
Despite being the most dominate player in search and video, Google doesn’t really have much presence in the social media business. It has its social network, Google+, but the time users spend on it has never been comparable to that of other social media services. Ars Technica once wrote that “the act of creating a Google+ account is often just an incidental byproduct of signing up for other Google services.” (Source: “Google Doubles Plus Membership with Brute-Force Signup Process,” Ars Technica, January 22, 2012.)
Although Google+ didn’t turn out to be as successful as the company had hoped, it doesn’t mean Google can’t succeed in this business. In particular, the company might be able to benefit from buying a social media company and right now, there is one with a great price—Twitter Inc (NYSE:TWTR).
Twitter used to be one of the most popular social media apps in the world. At one point, it was even considered as a threat to Facebook Inc (NASDAQ: FB). But since last summer, Twitter stock has lost quite a bit of interest from the market. In the past 12 months, the stock has plunged more than 50%.
However, the company is still solid. It has taken several steps to make its product more appealing to the mass market. By introducing native video capabilities, Twitter also improved its ad engagement and monetization metrics.
How would buying Twitter benefit Google? Well, a userbase of more than 300 million monthly active users would certainty be a good starting point for any company that wants to break into the social media business.
Also, Google already has a working relationship with Twitter. Last summer, Google started displaying Twitter’s content directly in Google’s search results. (Source: “Tweets take flight in the Google app,” Google’s Official Blog, May 19, 2015.)
In addition, the companies are working together on the advertising front. Last April, Twitter announced that advertisers on Twitter could use Google’s “DoubleClick” to buy sponsored tweets. Marketers can also use Google’s DoubleClick to measure their campaigns’ conversion results. (Source: “New measurement and buying tools through DoubleClick coming soon,” Twitter’s Official Blog, April 28, 2015.)
The Bottom Line on Google Stock
At the end of the day, keep in mind that social media can be a very profitable business. While Twitter’s financials are still not impressive enough, its cash flow has been improving. With TWTR stock’s downturn, Google might be able to get a good deal on the micro-blogging platform. Moving into social media could be the next big thing for Google stock.