Alphabet’s Ticking Time Bomb: Record Highs Mask Mounting Threats to GOOG

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is trading above $185 per share and breaking all-time highs. On one hand, the solid business fundamentals justify the rapid rise Alphabet stock has enjoyed.

However, I’m also avoiding Alphabet stock because it’s unclear how it will do in the artificial intelligence race and the soon-to-be decisions from Federal Trade Commission trials, which introduce severe risks but are often ignored by retail consumers. 

A Closer Look at Alphabet Stock

Many bulls behind Alphabet stock argue that the stock appreciation is justified due to improved business fundamentals. Looking at its Q1 2024 financials, this isn’t far from the truth. Revenue was $80.54 billion, a 15% year-over-year increase. Net income was $23.66 billion, a whopping 57% YOY increase. 

This is due to an increase in gross margins from 56.1% in Q1 2023 to 58.3% in Q1 2024 and a drastic improvement in operating margins from 21.6% to 29.4%. These improved financials are due to two key factors: increased revenue from Google Cloud’s high-margin business and layoffs. 

First, we saw Google Cloud’s operating income triple YOY. Google Cloud is the competitor to Amazon’s (NASDAQ:AMZN) Amazon Web Services (AWS), and Microsoft’s (NASDAQ:MSFT) Azure.

It lagged competitors but is now growing twice as fast as AWS. This is because Google Cloud has been successful with its AI capabilities, as 90% of generative AI unicorns are Google Cloud customers.

Still, we are only at the beginning of the generative AI market, and its cloud operations make up a meager 10% of the market. 

Second, we saw management successfully cutting costs and streamlining processes. In 2023, 12,000 employees were laid off, approximately 6% of its workforce, and another 1,000 employees will be laid off in 2024.

This is justified as it’s well speculated that many tech employees do no “real work” due to overtiring

But It’s Unclear If Google’s AI Will Pull Through 

In May, Google announced its AI Overview feature, which takes search queries and answers the questions using Google’s Gemini AI.

This feature promised quick and reliable information, but it often “hallucinates,” providing false information as facts. This resulted in Google rolling back the Overview feature from 84% of all searches to only 15%. Google’s Gemini, a direct competitor to OpenAI’s ChatGPT, is struggling.

ChatGPT offers more features, faster and more accurate responses, and better usability. In contrast, Gemini fails to answer complex questions conversationally and directly.

When compared for logical reasoning, ChatGPT scored 95.3% compared to Gemini Ultra’s 87.8%; it is unclear if Google can win in the AI race.

This rush to market with an AI search model is because Google Search is actively losing market share: From April 2023 to 2024, Google lost 1.9% of all search inquiries, while Bing (powered by OpenAI technology) gained .9% in that same period. If Google doesn’t pull through with its AI efforts, it could soon lose its dominance in search. 

Risk From Antitrust Cases Is Too Much To Ignore

Antitrust cases have plagued tech companies in the last few years, but they are not guaranteed to succeed and often take a long time to pan out.

Two antitrust cases against Meta Platforms (NASDAQ:META) were thrown out in 2021, and antitrust cases against companies such as Amazon are speculated to be hard to prove.

Big Tech companies such as Amazon, Apple (NASDAQ:AAPL), and Meta all have antitrust lawsuits over their heads, and they are all trading near their all-time highs if you look at their stock price as of June 26. 

Google hasn’t been an exception. Google faces two antitrust lawsuits for monopolies in online search and digital advertising. The first trial recently concluded, and a ruling is expected in late summer or early autumn.

The second trial is scheduled for September 2024. Buying Alphabet stock now carries the risk of a significant drop if unfavorable outcomes occur.

Google’s case resembles Microsoft’s in the 90s, where Microsoft’s end of anti-competitive practices paved the way for companies like Apple and Google. Bing’s small market share in search, at 3.42%, could have been a monopoly like Google’s.

The only difference between the cases is that Windows Explorer was targeted and it is now Google Search.

I believe that buying Alphabet stock at this time is an unnecessary risk. It would be better to wait and see how the trials pan out. 

On the date of publication, Michael Que held a SHORT position in AMZN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.