Strong Earnings Will Trump Political Risks for GOOG Stock

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The hammer has finally come down on GOOG stock. After years and years of legislators and politicians flirting with antitrust action against big tech companies, the U.S. Justice Department and 11 states have finally filed a landmark antitrust suit against Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), alleging that the tech giant has employed anticompetitive practices to protect its monopoly in digital search.

Considering this is the first major legal challenge against a U.S. tech company since the Justice Department brought antitrust claims against Microsoft (NASDAQ:MSFT) in the 1990s, one would reasonably expect GOOG stock to be hurting on this news.

But it’s not.

Since the suit was announced, GOOG stock has actually risen by a few percentage points, mostly because a powerful earnings report from digital ad peer Snap (NYSE:SNAP) has overshadowed the suit, underscoring that we are in the midst of a digital ad boom.

Does it make sense that this digital ad boom is overshadowing the biggest antitrust suit in 20 years?

Absolutely. Fundamentals trump optics. The current digital ad boom is a fundamental tailwind. The antitrust suit is an optical headwind that, fundamentally speaking, will end up being a nothing burger. Therefore, GOOG stock — despite the antitrust suit — will keep powering higher.

Here’s why.

Antitrust Action is a Nothing Burger

While the Justice Department’s antitrust suit against Alphabet may seem like a potential company-ending headwind, it’s actually a big fat nothing burger.

Here’s what is going to happen.

The suit is going to play out. The DOJ is going to argue that Alphabet is too dominant in search, and therefore, has too much power to influence how information is surfaced across the internet. Alphabet is going to say they have a bunch of competition from Bing, and that their algorithms aren’t biased towards one political party or agenda.

The two aren’t going to see eye-to-eye. It will end in a stalemate. Alphabet is going to pay a big one-time fine. There may be some restrictions put in place in terms of Alphabet’s search algorithm, which may or may not impact Alphabet’s search ad revenue.

And that’s about it. The world will move on. Google Search will remain the world’s dominant search engine. Google Cloud will escape unscathed. YouTube will escape unscathed. The company’s self-driving unit, Waymo, will escape unscathed. The entire Google Home business will escape unscathed.

Alphabet will remain a tech giant with enormous global reach. GOOG stock will keep powering.

So don’t let this near-term, ephemeral and largely meaningless headwind scare you out of a long-term winner like Alphabet stock.

Strong Earnings Coming Up Next

As opposed to paying attention to the antitrust suit, investors should turn their eyes towards Alphabet’s upcoming earnings report, which should be a blockbuster print thanks to the current digital ad boom.

Here’s the story.

The Covid-19 pandemic brought the global economy to a screeching halt at the end of the first quarter of 2020. With the economy not moving, companies stopped advertising. But, we have since adjusted to living with the virus, and economic activity has rebounded. As economic activity has rebounded, companies have put ad dollars back to work, because consumers are spending again.

Yet, consumers’ Covid-19 adjustments include living a more “digital” life — i.e. consumers are spending more time than ever on social media platforms. So these ad dollars that are going back to work, are skipping the TV, radio and billboard ads, and instead rushing at breakneck speeds into digital channels.

The result is a perfect operating environment for social media platforms. They are broadly benefitting from a simultaneous rise in engagement (because of Covid-19 restrictions) and advertiser demand (because of rebounding consumer spending).

This rising tide will help power strong numbers for Alphabet this earnings season.

YouTube’s ad numbers will be very strong, because YouTube has turned into a go-to entertainment hub over the past few months. Google Search probably had a good quarter, because one can presume that consumers are doing more Googling than ever before. Google Cloud’s numbers will also be very strong, on the back of robust demand for cloud-hosted work solutions.

Across the board, Alphabet’s numbers should knock it out of the ballpark. If they do, GOOG stock will shrug off antitrust headwinds and push to all time highs.

Bottom Line on GOOG Stock

GOOG stock is a long-term winner. The antitrust suit is a near-term headwind. If this near-term headwind causes pain in this long-term winner, buy the dip, especially ahead of what could a be a big earnings catalyst.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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