Google monopoly has a curious discount

Google is still growing at the rate of a start-up.

Google monopoly has a curious discount

Summary

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.

TAC down

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.

Break-up fears

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.


Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.