The Threat to Alphabet’s Share Price

Alphabet Inc. (NASDAQ: GOOGL), owner of the huge Google search engine business, has had a tremendous share price run this year. Trading at $726, it is up from a 52-week low of $515, and it has a market cap of $500 billion. The company has only one Achilles heel, which is its original business.

Conversations about search have been lost in those about self-driving cars, the rising advertising revenue of YouTube, the Android operating system, Gmail, Maps and Google’s TV products. None of these has much bearing on the health of the company, at least financially.

Last year, Alphabet’s revenue was $21.4 billion. Of that, $19.1 billion was from Google’s core ad business. Granted, Google search results did include non-search activity, according to the company’s management:

“Our very strong revenue growth in Q4 reflects the vibrancy of our business, driven by mobile search as well as YouTube and programmatic advertising, all areas in which we’ve been investing for many years. We’re excited about the opportunities we have across Google and Other Bets to use technology to improve the lives of billions of people,” said Ruth Porat, CFO of Alphabet.

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Much of Google’s 2015 focus was devoted to its paid clicks and cost per click. This is where Google’s success could fall apart. Aggregate paid clicks in the fourth quarter rose 31% from the year earlier quarter. However, aggregate cost per click fell 13%. The value of clicks, if it falls consistently, is a sign that Google’s revenue metrics have softened.

Experts on advertising pricing have argued recently that the efficiency by which companies can reach their marketing targets on the Internet has risen. Sophisticated software products drive down the prices advertisers pay. Another theory is that Facebook Inc. (NASDAQ: FB), which has added to its share in the national ad market, has taken some revenue from Google. And Facebook charges less for its advertising in some cases. The social network could hurt the search one.

Google also has taken a dominant position in mobile advertising. Most marketers pay less for mobile ads than they do for ones that run on personal computers.

As the recent stock market correction showed, tech company share prices are fragile. A modest piece of bad news can chop a market cap considerably. Google may have entered dozens of new businesses. To shareholders, it doesn’t matter.