In this comprehensive guide, we’ll analyze whether Google remains a smart long-term stock investment in light of its recent underperformance and competitive threats. Drawing on financial data and industry trends, we’ll evaluate risks and opportunities to help you make an informed decision.
Overview: Google’s Core Business Facing Ad Market Changes
Google makes over 80% of its over $250 billion in annual revenues from online advertising associated with search and YouTube. This cash cow business propels its stock price. Lately though, digital ad spending has softened across the board. Market leader Google felt the sting with its major ad revenue streams decelerating.
In this article, we’ll unpack what’s driving that slowdown. We’ll look at how competition from TikTok to Microsoft is impacting Google’s growth. Weighing these mounting risks against Google’s strengths, we’ll determine if its stock presents strong or shaky value right now. Time to dive in!
Google’s Stock Price Dropped Over 35% After Peaking
Google’s stock performance over the past decade reminds me of a rollercoaster ride. Smooth ascents eventually gave way to some steep plunges. Its share price climbed fairly steadily over its first 15 years as a public company. From its $85 IPO price in 2004 through 2019, Google stock gains came through execution more than hype.
Things clearly changed during the pandemic as investors piled into the stock. Google’s share price nearly doubled from $1,400 in January 2020 to an all-time high of $3,000 by late 2021. Spiking over 60% in a year, this meteoric rise pushed Google’s market value over $2 trillion.
Unfortunately, the surge proved unsustainable. Google stock cratered over 35% down to around $1,800 per share over the past 14 months. Like much of tech, Google got caught up in the broader market unraveling of pandemic winners. Investor sentiment shifted as shaky economic conditions emerged with rising interest rates and inflation.
However, company-specific weaknesses around its advertising cash cows also came into focus. Let’s analyze what’s happening with Google’s underlying business.
Google’s Advertising Growth Stalling Out
As we discussed earlier, advertising generates over four-fifths of Google’s ample revenues. So when cracks start forming in that foundation, investors rightly worry. Cracks have indeed surfaced lately, with Google’s latest quarterly results showing an alarming deceleration.
For many years, Google could bank on robust advertising growth of 20% or more annually. But through the first 9 months of 2022, total ad revenue expanded just 4%. Search advertising grew only 4% while YouTube managed just a 2% tick higher. Strikingly, Google even reported a drop in YouTube ad revenue from Q2 to Q3 2022 – almost unthinkable just recently.
What’s behind this sudden advertising growth stall out? A few concerning trends aligning against their ad business:
Companies Cutting Ad Spend: With budgets tightening amidst inflation and recessionary fears, many advertisers are pulling back on marketing expenses. Some forecasts predict overall ad spend dropping significantly in 2023.
Loss of Share to TikTok: Attention spans keep shrinking as consumers, especially younger ones, flock to short-form video. Hence ad dollars moving over to booming platforms like wildly popular TikTok rather than Google and YouTube.
Apple Privacy Changes: Apple limiting ad targeting capabilities on iPhones delivers another blow to Google’s ability to monetize mobile searches and YouTube views.
This trifecta of adverse impacts explains the abrupt decline in Google’s advertising growth. And the trends look likely to persist rather than proving temporary. Many analysts believe digital ad spending may never regain the hot growth posted over the past decade.
Cloud and AI Still Promise Growth Amidst Ad Woes
With storm clouds gathering over its cash cow business, Google needs its next-generation initiatives in cloud computing and AI to really kick into gear. These cutting-edge technology areas represent potential channels for Google to offset inevitable advertising maturation.
Cloud services has developed into a thriving industry as companies migrate more IT infrastructure onto public provider platforms like Amazon AWS, Microsoft Azure, and Google Cloud Platform. Though only Google’s third largest business today behind ads and mobile app store fees, cloud revenue has tripled since 2017.
However, rivals AWS and Azure currently hold bigger pieces of the cloud market pie. Google Cloud has struggled to keep pace as those competitors leveraged early traction with business and government accounts.
Encouragingly, Google Cloud managed to grow revenue faster than AWS and Azure last quarter. Under new leadership, it has big plans to boost partnerships and target more specialized use cases. Still, converting cloud into an at-scale profit driver remains a work in progress.
Over in artificial intelligence, Google sits in an enviable position with huge data troves to develop advanced machine learning algorithms. Key areas like computer vision, conversational systems, and predictive analytics will enable Google to enhance its services considerably. And leading in AI should open up entirely new revenue streams down the road.
Both cloud and AI present exciting opportunities if Google can execute. However, neither looks poised to immediately offset an advertising slump. These moonshots need to prove their monetization potential before factoring heavily into growth projections.
In the meantime, getting the ad business back on track stands vital for investor confidence. Let’s examine the bull and bear cases around Google before declaring a verdict.
Bull Case: Dominant Platform Poised to Rediscover Growth
Arguments for owning Google stock center on faith in management navigating this patch using the company’s considerable resources and talent. A temporary setback doesn’t negate competitive advantages rooted in Google‘s widespread products and services.
Advertising should reaccelerate once economic instability passes. Search retains unmatched reach and personalization abilities due to Google’s user data access. YouTube viewing rates keep climbing, suggesting the platform still offers premier video inventory as marketers reengage.
The company is also pushing new ad formats like shopping and brand campaigns to evolve past dependency on direct response ads. In cloud and AI, steady investment should translate into major market positions down the road. Careful cost control through any sustained downturn enables Google to stay hungry in shaping promising fields.
With low debt and around $100 billion in the war chest, Google can acquire innovators if desired too. The company knows how to identify and integrate startup talent as shown through savvy buys like YouTube itself many years back.
In the bull case, investors see current headwinds as fleeting. Leaders like CEO Sundar Pichai deserve the benefit of the doubt that they’ll guide Google through into the next stage of profitable dominance. Its vast resources and platforms give it an edge over focus startups addressing parts of its business.
Bear Case: Growth Era Ending as Competition Mounts
On the other side, bearish investors believe Google’s best days are likely behind it. The advertising landscape is undergoing seismic changes, and Google’s influence looks bound to keep diminishing. Rising platforms like TikTok are capturing more engagement and dollars, especially among coveted young audiences.
Even if the economy rebounds, ad spending may never regain prior growth levels. Consumer packaged goods and finance brands are wising up to wasted digital ad budgets with moves towards less programmatic channels. Without exploding top line anymore, Google stock loses its investment glow.
Meanwhile, generals like Microsoft and Amazon won’t cede cloud market share easily as they double down on partner programs and capabilities. And promising AI projects require ongoing costly research with monetization uncertain.
Bears also point to rising scrutiny from governments on privacy and antitrust issues that could limit how Google leverages data for targeting and product leveraging. More regulation poses a meaningful threat longer term as well.
Add it up and Google appears like a typical big company struggling under its own weight in maturing markets. The burden to reinvent multiple multibillion-dollar businesses like advertising and cloud stands challenging even for kings. Significant revenue drops in either area without off-setting gains could crush profitability and investor sentiment.
Verdict: Cautiously Optimistic on Google for Long-Term Investors
Evaluating both sides, I land cautiously optimistic on Google stock for long-term investors with higher risk tolerance. Near-term uncertainty definitely looms until management can clearly communicate plans to reaccelerate advertising. Market punishment seems likely until evidence emerges of that recovery and sustained cloud and AI progress.
However, I believe Google retains necessary resources and smarts to adapt its money-making machines. Digital advertising should rebound somewhat post-recession as budgets loosen. Search remains hugely valuable for lead generation that companies can’t ignore forever. YouTube watch time still far outpaces rivals, giving Google runway to address monetization.
Tactical investments and partnerships should also help cloud and AI gain steam over the next 5 years. Perhaps most importantly, Google generates immense cash flows even with decelerated top line that provide flexibility to transform initiatives into real needle movers.
So rather than an imminent meltdown from disruption, I expect Google to leverage its ecosystem to drive reasonable growth again within a couple years. Its current discounted valuation builds in minimal optimism that sets up substantial upside if execution crisply returns.
For investors believing in Google’s technical talent, the market correction seems overdone, making this an opportunity to grab shares at a relative discount. My recommendation is to nibble on GOOGL while acknowledging real possibility that stagnation continues until underlying drivers improve. Upside just appears to outweigh downsides over a long investment horizon.
