<p>The alphabet (NASDAQ: GOOG, NASDAQ: GOOGL) is a big winner in the digital advertising space, with a huge market share that consistently generates profits. The GOOG share reflects the effective moat it has in digital advertising.
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The share is down only 5.3% compared to the previous year, but up 1.4% compared to the same period last year. Most stocks have fallen sharply in the past year.
As I suggested, the main reason for the steady Alphabet’s main advertising activity. It represents over 83% of the company’s total $ 161.8 billion in revenue. Google‘s digital ad revenue was $ 134.8 billion, up 16% from last year.
Ad Moat and the GOOG stock
Google‘s revenue from digital advertising accounts for a staggering 36% of the total digital advertising market. According to Statista, revenues from digital ads from 2020 will amount to 374.2 billion dollars. But here’s what makes their market share so valuable. Digital advertising spending takes over traditional advertising spending.
A very thoughtful article this week in Seeking Alpha by Rob Barnett points this out. He explains that digital advertising spending was 55% of total global advertising spending ($ 593 billion) as of 2018. By 2020, the share will be even greater. Barnett claims that digital advertising spending will reach 80% of total advertising spending by 2o24.
In addition, Google and Facebook (NASDAQ: FB) effectively control over 57% of the digital advertising market. By extension, this duopoly controls over 45% of total advertising spending in the world (ie 57% times 80%). Over time, the proportion will increase.
So, in fact, companies are basically moving their advertising dollars from traditional media to digital online advertising sites. It only increases the stability and power (ie the “moat”) of Google’s advertising franchise.
Barnett claims that as a result of the new coronavirus, companies will be more dependent on digital advertising spending. Here’s why: since total advertising spending is likely to be lower by 2023, but digital advertising spending will not decrease as much, its share of total will increase.
Late last year, the Wall Street Journal published an interesting article on how Google became a juggernaut in the digital advertising market. One of its biggest deals was the 2008 acquisition of Doubleclick for just $ 3 billion.
That investment has paid off in spades ever since. No wonder the GOOG stock has a market value of $ 880 billion right now.
Risks to its franchise
But the Wall Stree Journal pointed out that regulators are investigating Google’s effective role as both digital auction ads and as a dominant advertising bidder. Google claims that the way its products work together is why its products are so attractive to ad buyers.
Another major risk is that global media companies raise copyright issues with Google using their content for free. For example, on Monday, April 20, the Australian government said that Google and Facebook must pay the media for news content in the country. According to the New York Times, this is part of an emerging global effort to save local publishers by moving to compelling technology giants to share their advertising revenue.
It can reduce the profits of the Alphabet. So far, there is no way to quantify how much it would cost. But if other governments follow Australia’s lead, Google may stop having to share its advertising revenue from content published without copyright.
What should investors do with the GOOG stock?
Right now, the alphabet’s stocks are looking pretty reasonable. The questions related to its digital adgrave can take several years to play out. They can hurt its basic underlying growth rate for advertising revenue.
In addition, it trades for about 26 times futures income. The company does not pay dividends. This is not a cheap valuation and does not include a safety margin.
The alphabet has an untouched balance sheet with $ 119.6 billion in cash and only $ 29 billion in long-term debt. So, in fact, the GOOG stock reflects its underlying business strength and revenue stability.
The question is whether the financial and business risks can begin to exceed the prospects for the company’s basic growth prospects. It may be worth waiting for a better opportunity to buy GOOG shares. There may be a time to buy when there is more safety margin in the future.
At the time of writing, Mark Hake, CFA holds no position in any of the above securities. Mark Hake runs the Total Yield Value Guide which you can review here.