“That’s what the money is for!” The climactic line from the series Mad Men explains why I just sold my shares of Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL). If you have Alphabet stock consider following suit.
Technology is a business of ideas, implemented by talented, enthusiastic, and fully empowered employees. It’s not like manufacturing. Google’s I/O developer conference has become an innovation-free snooze. Wall Street doesn’t understand this. It ruined Google, as it ruined Yahoo 20 years ago, by destroying employee idealism.
The Downsides of Alphabet Stock
Under CEO Sundar Pichai, working alongside former Morgan Stanley (NYSE:MS) banker Ruth Porat, Google has killed its “other bets.” It has let its key search business be degraded. It has fallen behind in artificial intelligence.
Instead, it has relied on payments to keep the search business going. It has focused on selling Cloud the way Walmart (NYSE:WMT) sells groceries, on price.
The search payment issue is the focus of a trial now approaching its climax in Washington. Few seem to be anticipating a Google loss. Those who do seem to believe appeals and political contributions can change the outcome.
It’s a tremendously cynical attitude.
Google has lost talent by demanding people return to the office, which can amount to a 20% pay cut. Firing hundreds of employees, moving that work to India and Mexico, is evidence of a serious problem.
While employees are leaving Pichai is becoming a billionaire. I don’t doubt he has earned his money. But flouting that status while firing people isn’t good for morale.
While engineers are being shown the door, Google Cloud is hiring salesmen. Google Cloud is growing, but it’s not gaining much market share. It’s still just 11%, despite all the incentives and sales presentations being thrown at it. Cloud should sell itself.
Leaders in Exile
Larry Page and Sergey Brin, neither of whom works there, controls the votes Alphabet stock. Page is investing in start-ups. Brin has personally intervened to keep an AI expert from quitting.
But there’s a false assumption built into Brin’s minimal involvement in the business. It’s that a small number of super-geniuses can drive Google’s AI forward.
This runs counter to the computer industry’s entire history. Computing is a team sport. Open source wins over time because it can put more eyes on the code.
Here again, Google is hoping that regulation can provide a barrier to entry against competitors. But that ship sailed long ago. Denying open source a place in AI development means denying one to Meta Platforms (NASDAQ:META), which has based its entry on the open source concept.
While Google today is worth $2.1 trillion, there’s a reason its price to earnings ratio is 25, against 36 for Microsoft (NASDAQ:MSFT). Even Meta is ahead of it, at 27, despite Google’s new dividend.
The Bottom Line
In this century, Google has gone from being a scrappy opportunist to a co-monopolist in advertising and cloud, and Alphabet stock benefitted.
It’s good to be the King, but the crown is a heavy weight. You’re always facing competitive threats. Government becomes a key competitor as well.
The biggest risk to Google’s status today is the antitrust case. Too many discount the risk. But I personally saw what Microsoft’s consent decree did to that company.
It brought in scores of lawyers and consultants whose job it was to say no to innovation. Google’s supporters like to bring this up in defense of their client.
For Google, the ad business is its Microsoft Windows. It’s the profit center that lets the rest of the company go lazily on its way. What happens if it must compete again, as it must in AI?
I’d rather own Microsoft. Even Meta.
As of this writing, Dana Blankenhorn had a LONG position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.