Google monopoly has a curious discount
Google is still growing at the rate of a start-up.
Another record quarter
Alphabet is growing so fast that even the European Union’s biggest ever fine left quarterly net income above $3bn. Adjusted for the penalty, earnings per share were $10.58 compared to $9.52 expected. Cushioned financials were testament to the group’s dominant search franchise, the greater part of businesses housed in Google. These hit the latest in a spate of recent records with net revenue of $32.5bn.
Even more than for Microsoft though, market reaction was wanting, perhaps wary after the stock’s new milestone. The rise of around 4% was in line with the rate of Q2 net income, projected across the financial year. But the third quarter profits tend to be Alphabet’s most modest. In effect, investors were applying a discount to 2018 earnings. Forecast around $30bn, they would be more than double 2017’s. True, Alphabet’s expenditure levels are still full tilt. The group is rushing to install AI-driven ad models and pushing to make YouTube a more credible rival to Prime Video and Netflix. Still, Google’s key traffic acquisition cost (TAC) measure fell for the first time in three years in Q2. Given ambient margin pressure as web consumption moves to smaller screens, lower TAC is a big deal. Alphabet’s broader Cost of Goods Sold Measure also behaved. A 33.84% rise in the June quarter was the slowest since Q3 2017.
Investor scepticism crops up elsewhere too. Alphabet’s enterprise ratio valuation—forecast earnings over market cap plus net debt— trades at discount to dominant web groups. At 13.2 times the next 12 months’ earnings, the Google-owner lags Facebook’s 13.8, and is well under a 16.9 times average. This suggests investors have difficulty processing Google’s near-monopoly status. Break-up fears may linger, but Margrethe Vestager, the European Union’s competition chief, shied away from calling for one on the day she imposed the huge fine. Washington advocates of that approach are also in a minority, even as Google scrutiny ratchets higher on Capitol Hill. If Alphabet’s more disciplined cost performance is sustained, continued scepticism risks leaving cash on the table.
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