Google Inc (NASDAQ:GOOG) has been riding high on solid earnings reports and bullish investor and analyst views, like Stan Druckenmiller, who recently explained why Google is his biggest position. Bernstein analyst Carlos Kirnjer has a different view, however, suggesting that there are eight bearish positions investors could take—even though bearish views of the companies appear to have all but disappeared now that the stock is over $1,000 a share.
He admits that even at Bernstein they remain, overall, bullish on Google Inc (NASDAQ:GOOG), but he says there is some value in considering the other side of the argument. I’ve taken the time to organize his bearish theses into categories.
Google clashes with regulators, governments
1) First, he notes that leaks about the National Security Agency’s PRISM data mining program could have a long-term effect on Google and other Internet companies. He suggests this one may have the most likely possibility of negatively impacting the search giant’s performance although notes that they haven’t thought of anyone asking about this and that Wall Street “just does not seem to care.”
As a result of this, regulators in multiple regions are working on new regulations which could require significant investments in data centers, hardware and software. These investments could take a bite out of Google’s bottom line.
2) Google could also face more antitrust investigations, mostly in Europe and also in the U.S. European regulators and the U.S. Federal Trade Commission have already been scrutinizing the company’s practices, and Kirjner believes Google’s growth has already been hampered by antitrust regulations.
Can Google keep growing search revenue?
3) The analyst also questions whether Google Inc (NASDAQ:GOOG)’s growth in search revenue is sustainable. He believes that it is, although investors may expect it to decelerate. If search revenue falls off significantly in a short amount of time, he says their bull case falls apart.
4) A related issue is the monetization of future search. He notes that Google keeps innovating and transforming search monetization but that it adds risk every time it does this. He suggests that advertising may become less effective if Google is able to improve upon search results beyond the point when advertising will work.
Concerns about how Google spends its money
5) And then there are concerns about how Google Inc (NASDAQ:GOOG) spends all the cash it is raking in. He said the company’s earnings per share and free cash flow growth could be slowed by overinvestment into research and development. The analyst notes that as the growth of Google’s lower margin businesses has sped up, the company’s gross margins have declined, and he thinks will continue. He said this will likely cause gross profits to grow more slowly than revenues.
In order for “Google’s stock to work,” he said the company must deliver “at least mid-teens growth of operating income (and EPS).” In order to do this, he says the company will have to keep research and development investments under control.
6) A related issue is just use of cash in general, especially for mergers and acquisitions. He expects Google Inc (NASDAQ:GOOG) have about $100 billion in liquid assets, almost double the $53 billion it has right now. He says although “a few acquisitions” in the low billions wouldn’t change this part of the equation. However, the company’s large cash pile could be seen as a huge negative because of concerns about mergers and acquisitions or a big positive if the company returns some of its cash.
Google may get too big
7) And then there’s the fact that Google is such a massive company already, and it will only get bigger. Management issues could become a problem as the company grows and becomes more complex in its structure. The analyst also notes that Google’s structure is somewhat unique in terms of huge companies and, as a result, they aren’t sure how to measure the risk of this concern. However, he believes this should be one of management’s biggest concerns.
8) Finally there is the issue of what he calls “the carrier bottleneck.” He cites mobile and broadband markets with very few players, thus restricting Google Inc (NASDAQ:GOOG)’s growth. The analysts suggest that the company is already aware of this issue and trying to tackle it with Google Fiber and other initiatives.
