Google Stock’s Recent Slide Rooted in Basic Fear, Not Facts
Alphabet Inc (NASDAQ:GOOG) stock has slipped for almost two weeks. Since October 24, Google stock has lost four percent of its value, just as it seemed ready to set new record highs. Has Google lost its luster?
Quite the opposite; the case for Google stock has never been stronger. If anything, investors could consider the recent drop as an opportunity to get into GOOG at a cheaper price. The latest quarterly results certainly confirmed Google’s favorable positions. Google has tons of cash, higher-than-ever advertising growth, and big plans. What more should it have to do to demonstrate its enormous potential?
If GOOG stock has lost some value—and from its record high at that—in the past few days, it’s because investors fear an ongoing European Union (EU) antitrust investigation. True, if the investigators get their way and the judge rules in their favor, Google may have to cough up $12.0 billion in fines. It’s not ideal, but Google has the resources to pay the fine without affecting its growth and diversification plans.
Apple Inc. (NASDAQ:AAPL) faced a similar problem in September with comparable financial repercussions (also with the EU) over some $12.0 billion in back taxes. Apple stock is trading at its highest level since last June.
So now, let’s review Google’s excellent quarter.
Google’s Results Speak for Themselves
Alphabet Inc, Google’s parent company, unveiled higher-than-expected results for the third quarter of 2016. The famous Internet company generated third-quarter net earnings of $5.06 billion. That’s a massive $7.25 per share, compared to $5.73 per share. Excluding items, earnings per share (EPS) were $9.06, which is $0.43 better than the Reuters consensus. Alphabet Inc’s revenue rose 20% to $22.45 billion, once more exceeding the expectations of $20.0 billion.
The figures, which also point to continued opportunities for growth, come from the crucial advertising revenue. This grew a remarkable 18%, hitting $19.8 billion. Users have clicked on 33% more ads. This growth accelerated from the second quarter. It’s true that the average price paid by an advertiser on Google has fallen, but the revenue speaks for itself.
It’s this kind of success that has attracted EU regulators, snooping into competition practices. The point is, regardless of the outcome, growth is not going to slow. Having established this basic tenet, Google has rejected accusations that it has distorted competition. The EU accuses Google’s “Google Shopping” and “AdSense for Search” of harming its competitors in the EU. In other words, the EU is concerned about Google’s dominant position.
Google denies the charges. In simple terms, the EU accuses it of altering search results such that competitors get less visibility. Google, however, denies the very definition of “online shopping” used by the EU authorities. But the point on which Google insists is that consumers have changed their online shopping habits. They don’t visit a specific web site like Amazon.com, Inc. (NASDAQ:AMZN); online shoppers look for items on search engines to compare prices. They reach sellers’ websites in different ways.
Little of This Should Affect GOOG Stock for Too Long
Even in the worst hypothesis, by which the company will have to pay a few billion dollars in fines, Google’s parent Alphabet Inc had $83.0 billion in cash on its balance sheet as of September 30. The EU vs. Google dispute is far from over. At the end of this process, Google could have even more cash at its disposal. The company has proven to be a cash machine. (Source: “Q3 Bottom Line: Google A Cash Machine, Amazon A Free Spender,” Investors’ Business Daily, October 28, 2016.)
Google stock looks like it is in the race to become the next $1,000 stock. Google’s parent is considering the long-term and medium-term growth prospects.
Such is Alphabet Inc’s vision that it has started to work on what could be one of the next big things: the combination of pharmaceutical medicine and computer science. Google has already joined forces with Sanofi SA (ADR) (NYSE:SNY) to improve diabetes treatments. (Source: “Alphabet and pharma company Sanofi are teaming up to work on new diabetes treatments,” The Verge, September 12, 2016.)
Then there is the “Google Car” project, which could develop the software and operating system, which might dominate the next generation of driverless cars. Google stock appears to be ready to reach for bigger highs in 2017 and beyond.