It would seem that Google by another name smells sweeter to investors.
After its stock was pummeled for the better part of the last two years, Alphabet Inc. (GOOG, GOOGL), or the company formerly known as Google, has been on a roll this year. The company beat analyst estimates handily, cut back on its operating margins, and announced a share buyback program in yesterday's earnings call. In response, investors drove up the company's share prices to a record high for the second straight quarter.
But, investor enthusiasm for the company's future prospects may be premature.
Here are two reasons why.
Struggles In Transitioning To A Mobile World
The dominant theme of yesterday's earnings call was Google's transition to a mobile world. (See also: Mobile Ad Competitors: Facebook Vs. Google).
After drawing roughly equal in the previous quarter, mobile searches have overtaken those on desktop, according to the company.
In the short term, this is bad news for the company because it means a decline in ad revenues for its cash cow: desktop searches. The Google search engine is a sort of de facto entryway to the Web which is accessed primarily through desktops. A decline in desktop search will have a profound impact on its revenues. Already, the company has reported a 11 percent decline in its aggregate cost per click advertising revenues this quarter from the same period last year. (See also: Is Google Getting Weaker?)
But, it will take some time for mobile to pick up the slack.
This is because ad rates on mobile are significantly lower in comparison to desktop rates. At the same time, there are user interface problems with the mobile experience because it is splintered across multiple apps. This leads to problems in replicating the Google's ad display network on the platform. What's more, mobile screens have limited real estate to display ads. Consequently, this means that mobile ads have low click-through rates and translate to less revenue for Alphabet Inc. The rise of ad blocking software, which blocks mobile ads on websites, has further complicated matters.
Google has already begun implementing a deep linking strategy across apps. But, given the revenue breakdown in its latest balance sheet, it seems the strategy will take some time to affect its top line as well as bottom lines.
Emerging Markets Profits Will Take Time
During yesterday's earnings call, Google CEO Sundar Pichai referred to the "strong mobile momentum" in emerging markets. In the absence of a significant market presence in China (the company does not earn much from its mobile Android platform), India retains an outsized importance in the emerging market rubric for Google.
But, the company is still struggling to implement a coherent strategy there. At a starting price of $100, Google's flagship Android One phones, which were supposed to bring Internet to the masses, were considered too expensive when they were launched at the end of last year. The phones have had dismal sales in the country. The company recently said that it was planning to introduce sub-$50 phones in Indian markets.
Obviously, there is a period of adjustment before organizations are able to meet the demands of a foreign market. The problem is that Google faces fierce competition in India against Xiaomi and Facebook Inc. (FB), which is promoting Microsoft's Bing on its phones.
The Bottom Line
There is no doubt that Alphabet Inc., is one of the most innovative and successful companies in the technology industry. However, it is making a critical transition to a new business model, platform, and revenue mix. As such, investors's sudden enthusiasm for the company's short-term future prospects is misplaced and puzzling.