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Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) has assembled an exceptional set of assets, including YouTube, Gmail, Google Maps, Google Chrome, Android, Google Drive and Play. Each of these products has more than one billion users and they have helped to increase the market capitalization of the Alphabet stock to more than 750 billion dollars. The company has also invested heavily in R & D, in areas such as autonomous cars and artificial intelligence (AI).
The disappointing returns of GOOG shares
Despite everything, the alphabet has been a disappointment in recent years. In 2018, its return was essentially 0%. And over the last five years, the average gain of the Alphabet title has been 9.38%. During the same period, Amazon.com (NASDAQ:AMZN) posted a return of 33.49% and Microsoft (NASDAQ:MSFT) jumped 25.53%.
It is true that Alphabet has managed to quickly develop its turnover. Over the last five years, the growth of its business turnover has been about 19.21% on average. Given the size of the alphabet, it's impressive.
So why have Alphabet shares generated poor returns in recent years? Is this trend likely to continue or could GOOG's actions be reinstated? It is not easy to answer these questions. But I think one of the reasons for the poor performance of the Alphabet stock is that advertising still accounts for about 85% of the company's total revenue. And a significant part of its advertising revenue still comes from its traditional research activity.
In other words, the alphabet stock can be an example of the performance of MSFT, Intel (NASDAQ:INTC) and whitefish (NASDAQ:CSCO) in the early 2000s, when these companies are mature and more difficult to expand into new categories. As a result, all these stocks generated below-average returns for an extended period.
A tough competition for GOOG
But things could even be worse than for GOOG, because its advertising activity could be disrupted.
One of the reasons for the vulnerability of the GOOG stock is that the company has failed to develop a social networking platform. Allowed, Facebook (NASDAQ:FB) has his problems. But the company still has a large user base, advertising Facebook as an indispensable tool for marketers.
Amazon is another threat to GOOG. Do not forget that advertising is fast becoming a major source of growth for the e-commerce giant. According to estimates from eMarketer, it would appear that AMZN could generate $ 4.61 billion in advertising revenue this year.
Even if it is only 4.2% of the global market for digital advertising, AMZN will remain the third player in the sector. GOOG currently occupies 37.1% of the market and Facebook, 20.6%.
More importantly, AMZN has good experience using its platform to penetrate new markets. Just look at its cloud business, which is the leader in market share and continues to grow at a rapid pace.
Amazon's advertising activity could reach similar levels. According to Mike Olson of Piper Jaffray, revenues from this segment could reach $ 16 billion by 2020.
This seems like a reasonable estimate. Marketers want to quickly see the results of their ads. What better way to achieve this goal than to advertise on an e-commerce platform whose users are primarily focused on purchasing?
But AMZN has other major benefits for advertisers. The company has various channels such as Kindle, Twitch, voice assistants, etc., which offer a wide range of options to advertisers. But Amazon's biggest advantage may lie in its huge amount of data, which allows marketers to more effectively target groups and personalize their ads.
The Bottom Line on GOOG action
After the recent sale of the markets, the valuation of the Alphabet share is reasonable. Note that the price / earnings ratio of the GOOG stock is about 23.
But a stock can stay cheap for a while. And GOOG faces some pressure from FB and AMZN that may limit GOOG's revenue growth in the coming years. In other words, these headwinds may prevent the Alphabet stock from generating higher returns than the market.
Tom Taulli is the author of High Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. At the time of writing these lines, he held no position on the aforementioned securities.
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