Alphabet was founded in 1998 by Stanford Ph.D. students and computer scientists Larry Page and Sergey Brin.
The search engine giant has become so ubiquitous that the original name has become a verb because you don’t search for something online; you “Google” it. This despite the fact the name was changed to Alphabet Inc. (NASDAQ: GOOGL) in 2015 to act as a public holding company.
What began as an online search engine, the company now offers more than 50 services online, from email to online document creation, software, mobile phones, tablet computers, and much more. Initially funded in part by Andy Bechtolsheim, a co-founder of Sun Microsystems, the company became the client search engine for Yahoo in 2000, a partnership that lasted until 2004.
The company went public in 2004 in a rare Dutch Auction where potential investors put in bids for shares. The final IPO count was 19,605,052 shares at $85. In 2014, the shares split in a 2-for-one split, and in 2022, investors were rewarded with a 20-for-one split as the price went from $2,255.34 to $112.64.
Alphabet has rewarded shareholders in a big way over the last 20 years, but investors looking to grab shares now need to be careful. We found seven reasons why caution is a good idea now.
Alphabet shares are expensive
While trading at less than the ten-year average of 29.02 price-to-earnings, the current PE of 25.72 is still way above the level at which many companies trade. While well below the 13-year high PE of 66.05, the current ratio has risen 10% higher over the last four quarters.
Alphabet relies heavily on advertising for revenue.
Like many big tech companies, especially social media, Alphabet relies on advertising, and with customers able to cancel at any time, a sharp drop in the economy could slow down revenue growth from less advertising. The lagging effect of 18 months of rate hikes could come into play next year.
Will ChatGPT and other Artificial Intelligence apps cut into Alphabets search silo?
While the generative AI apps are reasonably new, as ChatGPT was just introduced about a year ago, many across Wall Street see the potential for multiple companies to produce chatbots that could cut into the alphabet search business. Microsoft Corporation (NASDAQ: MSFT) has added ChatGPT to their Bing search engine.
Could more muscular tech giants start to poach Alphabet’s business?
Some analysts feel that companies with more robust ecosystems could begin to take business away from Alphabet, especially Microsoft and Apple, Inc. (NASDAQ: AAPL). While the Alphabet Android franchise is top-rated, Apple can wean customers away from the company, especially for smartphones, tablets, and more.
Stock-based compensation could lead to some significant insider selling
Almost all tech companies reward and compensate employees with oversized stock packages; many have long vesting periods. Alphabet executives are capable of some massive sales. In 2022 alone, the insiders sold almost $2 billion worth of shares, and there was only one buy of $250,000. According to published reports, Alphabet has among the highest stock-based compensation levels relative to operating cash flows.
Alphabet has been accused of corporate malfeasance
Like many of its big tech brethren, the company has been accused of tax avoidance, misusing search results, and using other companies’ intellectual property. Some have even complained about the company’s massive server energy consumption.
Epic Games lawsuit win could be dangerous for Alphabet
Alphabet recently lost a substantial antitrust trial to Epic Games where the company was found guilty of violating antitrust laws in the Google Play Store. If upheld, the decision could change how Alphabet (and Apple) markets and distributes third-party apps.
Alphabet remains a massive figure in technology and will likely remain so. Challenging supremacy in search is no easy quest, as Microsoft and others have found out. It makes sense for investors looking to buy or add to positions to wait for a pullback in the stock as the shares are trading just below a 52-week high.
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