Google’s shares have clung tenaciously near record highs after a three-month, 30% rally fuelled by rising optimism about internet advertising, but Wall Street fears it may be running out of steam.
Google stock has hovered near an all-time high of $774.38 since touching that peak on October 5. To break through that level, investors and analysts say it needs to run a gauntlet of risks that could undermine its status as technology’s second-most valuable company. The most immediate concerns centre on competition in the mobile arena, which is shaping up as the main battleground for tech supremacy among Google, Amazon.com, Microsoft, Apple and Facebook.
Investors point out that Google’s Android — despite being the world’s most-used mobile software — has yet to yield significant revenue growth. And the company has not yet articulated a coherent strategy in the wake of its $12.5-billion acquisition in May of cellphone maker Motorola Mobility.
In the longer term, a rising wave of regulatory scrutiny both at home and abroad could represent the single biggest risk to the Google story. Regulators are looking into whether Google is competing unfairly by favouring its own properties in its core search product, and whether it inappropriately uses sensitive personal data to target ads.
To be sure, of 45 investment brokerages that cover Google, 36 rate it a “buy” or “strong buy”, with the median price target standing at $845 — up another 12% from current levels — and the most bullish target at $910. Among portfolio managers, at least one maintains a $1,300-target, after factoring in Google’s growing cash and securities pile.
“Their business model alone makes them an incredibly easy target for a whole bunch of legal matters,” said Kim Forrest, an analyst and portfolio manager at Fort Pitt Capital Group who recently owned Google shares.
“To date they’ve done well managing it,” Forrest said, referring to Google’s interactions with regulators. “But I think it’s their big risk. Most investors don’t fully understand that, professionals as well as retail.”
Google’s run-ins with regulators over the years have invited comparisons to Microsoft and IBM, two tech giants that were once distracted and constrained by long-running antitrust battles.
“They seem to be well-positioned in display ads and mobile, which are nascent industries,” said Connor Browne, portfolio manager of the Thornburg Value Fund. “The biggest risk by far is regulators bringing an antitrust case, a la the Microsoft Internet Explorer suit that company faced.
“Our expectations are nothing material