GOOG Stock: This Could Be Bad News for Alphabet Inc (and Google Stock)

A Problem for Google StockA Problem for Google Stock?

Regulators in the European Union delivered another set of antitrust charges at Alphabet Inc’s (NASDAQ:GOOG) doorstep, but Google stock wasn’t really affected. Clearly, the market doesn’t seem to think that regulators have much to stand on.

Back up: what exactly are EU regulators upset about?

Well, the European Commission is concerned that Google has a de facto monopoly on search engine traffic. It has leveled three separate claims against the company, including that it favors Google products in search results. (Source: “EU Antitrust Regulators Just Charged Google for the Third Time,” Fortune, July 14, 2016.)

No one can really predict what the outcome will be, but I think people often forget that Google’s search is still part of a commercial operation—it exists to make money. Just because the company has wiped out the competition doesn’t mean it has broken any laws.

If You Own Google Stock, Know This

In fact, the billionaire investor Peter Thiel once said that Google’s position is the desired end game of every business. It is “so good at what it does that no other firm can offer a close substitute,” he said. That’s why Google controls more than 90% of Europe’s search traffic. (Source: “Peter Thiel: Google Has Insane Perks,” Business Insider, September 16, 2014.)

On the surface, this may seem like a bad thing. Aren’t economists always talking about “perfect competition?” Isn’t that supposed to be the best thing?

Not for shareholders, says Thiel. For shareholders, perfect competition means that a company has umpteen rivals to fight at the same time. The company is then under threat from all sides. If it tries to increase profits for even a second, a competitor could poach its market share.

“In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future,” says Thiel. “Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.” (Source: Ibid.)

He has a point. Google controls more than two-thirds of all search traffic, which is great news for Google stock. The share price is directly tied to advertising revenue and that’s driven by the number of eyeballs Google can deliver through searches.

(China is the only market in which the company lacks influence, but that’s a story for another time…)

The important thing is that Google won its enormous market power by providing a better service. No one I know wants to use Bing. Seriously, no one at all.

Unless the EU can magically convince the majority of Internet users to stop using Google search, I really don’t see these charges weighing on Google stock. What’s far more significant is if the company increases its presence in the cloud computing game.

Instead of just focusing on individual users, Google is looking to challenge, Inc. and Microsoft Corporation for corporate cloud computing clients. This is a highly lucrative industry with plenty of undiscovered profits, so I’m optimistic about its impact on Google stock.

According to a highly placed Google executive, the company is actually scoring some big wins in the bidding process. Considering that only five percent to 10% of companies have their workloads on the “cloud,” there’s still an estimated $1.2 trillion up for grabs. (Source: “It’s Google’s Time to Shine in Big Business,” Fortune, July 11, 2016.)

The Bottom Line on Google Stock

Google is among the leaders in this market, which means its next generation of growth will likely come from cloud computing rather than search. It is an important step in diversification for the company. Perhaps it will also get regulators off Google’s back.

To sum up the case for remaining bullish on Google:

  1. Don’t believe anyone’s predictions on the antitrust charges; no one can be sure except those making the decision.
  2. Whatever the outcome, it shouldn’t have any long-term effects on Google stock.
  3. Google’s already moved on to other things, namely cloud computing for corporate clients. That’s where its growth will come from.