Weekly Wreck

Alphabet - Risky Investment?

With its dual-class voting structure and subsequent control of the company by a few insiders in management Alphabet [GOOGL] has always been a questionable company from a governance standpoint. This, the lack of a dividend and the many expensive and questionable "other bets" probably explain why the firm doesn’t trade for even more than the current $1,150.

If there is one thing that IBM and Microsoft both demonstrate, it’s that whoever is king of the tech mountain won’t be there forever. There is a window of time for investors to make the largest returns, and then that window disappears, probably forever. Investing in driverless car technology, however successful and interesting, is probably never going to be a core product of a marketing and search firm. At best the technology will be sold off, at worst we are looking at another Xerox PARC and the car companies will simply copy what Alphabet develops. For Alphabet, automated cars is simply an expensive bet that could pay off but probably won’t.

We already see calls for Alphabet to be broken up, just like IBM and Microsoft in their heyday. Just as we saw in these other firms, even if the breakup doesn’t occur, management will be focused on the issue and become bound by more and more restrictions on how it can monetize its core and currently very profitable search business.

Indeed since search is a utility in many ways and used worldwide it is all but impossible to avoid upsetting some group or government with the Google model. Groups everywhere want to control their rival’s ability to communicate while maximizing their own, and today the way to do that today is to gain control of the Google search engine, for example, the EU’s "right to be forgotten." At a certain point, Alphabet will become so encumbered by regulation that smaller competitors that maybe only function at the national level are able to take more and more market share. Maybe this is the EU’s plan?

Bottom line, investors need to take their returns now, not invest in the speculative pet projects of Alphabet management.