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Sunday, February 5, 2023

Alphabet May Have Become Overvalued

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Of the four largest Cloud Czars, Alphabet (NASDAQ:GOOGL) stock is the cheapest.

letters spelling out google

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The artists formally known as Google entered trade Oct. 1 at $1,484 per share, a market cap touching $1 trillion, a price-earnings multiple of 32. Apple (NASDAQ:AAPL) is at 35, Microsoft (NASDAQ:MSFT) at 36, and Amazon.com (NASDAQ:AMZN) at an unbelievable 121. Microsoft and Amazon are worth about $1.5 trillion each, Apple $2 trillion.

Alphabet stock is also cheap measured against sales. Google had revenue of $161 billion last year. At its current valuation, the stock sells at 6 times revenue. Apple sells at 7.6 times sales, Microsoft at 11 times sales, and while Amazon is at 5.6 times, remember most of that comes from retail.

Could Google Be Expensive?

Why is Google so cheap relative to its peers?

One reason is that it’s not just a software company anymore. Wall Street no longer values hardware as it did. Google spent Sept. 30 reminding Wall Street that it’s now a big hardware company. It rolled out new versions of its Pixel phone, Chromecast streaming device and Nest speakers. None are currently market leaders, as Apple is bigger in phones and Amazon beats it in speakers and streaming devices.

Google doesn’t break out hardware in its quarterly report, which for the second quarter saw no growth over 2019. What’s growing is its enterprise business, Google Cloud, up 50% from a year ago. Net income for the quarter was also down 30% from a year earlier.

Seen strictly from a financial perspective, Google may be overvalued, not undervalued. It’s no longer growing, costs are rising, profits are falling. Yet analysts remain wildly enthusiastic. None say sell, only two say just hold it, and 32 scream buy, according to TipRanks. Their average price target is $1,781, a 21% gain from the current price.

What the Analysts See

Analyst Gene Munster expects Google to be “innovative,” even though except for search Google is a me-too company. It’s still trying to get its latest copycat venture, buying Fitbit (NYSE:FIT) to compete with the Apple Watch, over the finish line.

Our Larry Ramer said to “buy on weakness” Sept. 22, based on Google’s strengths in advertising. Shares are up just 1% since that call. TV analyst Jim Cramer also pounded the table for the stock on Sept. 21.  Morgan Stanley (NYSE:MS) analyst Brian Nowak says Google should be a big winner from a “shelter in place” holiday, based on the shop-at-home trend.

The Real Problem for Alphabet Stock

The real problem with Google, which I think investors see more clearly than analysts, is that it’s not an innovator anymore.

Ever since CFO Ruth Porat came onboard in 2015, she has been pushing Google’s “creatives” to cut their costs, pulling back on “other bets” that are a drain on profits. Google was once magic. The magic is gone.

The result is a copycat company. Google phones aren’t iPhones, its Nest speakers aren’t Alexas, its Chromecasts aren’t even Roku (NASDAQ:ROKU) sticks. Google has one cash cow, search, which analysts on both the left and right want reined-in. It has one growth engine, Google Cloud, which is not gaining share against Amazon or Microsoft.

The Bottom Line

When companies stop innovating, they stop growing. When companies stop growing, they start dying.

I blame Porat. She has taken away the imagination that once marked Google, replacing it with the kind of financial “good sense” that killed such great companies as IBM (NYSE:IBM) and General Electric (NYSE:GE).

If Porat institutes a dividend, and with almost $120 billion in cash on the books I’m sure analysts are hoping for it, sell. Once the market realizes Google is just General Internet, it’s game over.

At the time of publication, Dana Blankenhorn held long positions in AMZN, AAPL and MSFT.

Dana Blankenhorn has been a financial and technology 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. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.

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