2 Terrible Reasons to Sell Alphabet Stock Now

Even for this best-of-breed tech giant, there are analysts who see bearish signs ahead. Some of their concerns might even be legitimate. But worrying about others is to miss the long-term forest for the short-term trees.

Andrew Tonner
Andrew Tonner
Sep 7, 2017 at 11:32AM
Technology and Telecom

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) stands unequivocally as one of the most successful tech companies of all-time.

The business formerly known as Google rose from a two-person start-up operating out of a friend's garage to become one of the largest companies in the world, and it has been one of the best growth stocks to own since its 2004 IPO.


GOOGL data by YCharts

Today though, a small subset of analysts and tech industry experts sees increased risks facing Alphabet shares. To be clear, this is a minority opinion: 38 of the 45 analysts  covering the company rate it a buy or a strong buy. Now, it does pay to understand all aspects of an investment thesis before buying. But while one can find some valid negatives about it, my advice it to ignore these two specific reasons to sell Alphabet stock.

No. 1:  Analyst downgrades

Stocks, particularly large cap stocks like Alphabet, are upgraded and downgraded frequently, and for a whole host of reasons. Let's take as an example the downgrade of Alphabet stock from earlier this summer by boutique bank Cannacord Genuity.

In the downgrade note he released in mid-June, Cannacord analyst Michael Graham voiced concerns over Alphabet's ability to continue to grow its advertising revenues in line with their historic rates. By his reckoning, Alphabet cannot continue to increase its per-ad rates, so it will need to find new sources of "ad inventory" -- industry parlance for places to show ads. He also noted that some investors had shown concerns over the valuation of so-called FANG stocks , an acronym for Facebook, Amazon, Netflix, and Google (now Alphabet).

This could be the case, but it also overlooks the broader fundamentals. Good things take time. In any given year, there have been plenty of reasons to avoid owning stock in companies like Amazon, Apple, Berkshire Hathaway, and countless other examples. However, focusing on near-term headwinds obscures the broader narratives that have made these companies some of the best-performing stocks over the long term. And focusing on short-term analyst downgrades is a great way to miss the forest for the trees, much to your portfolio's detriment.

An images of Alphabet's Google offices in Sydney

Image Source: Alphabet 

No. 2: The loss of its start-up mentality

Maintaining success is a challenge in any business, but it's especially difficult to stay at the top of the food chain in the tech industry, where the pace of innovation has only accelerated in recent years.  To hold onto its position, Alphabet will need to be both a powerful incumbent and an agile innovator, a difficult and sometimes contradictory pair of tasks.

The company's co-founders reorganized Google into  Alphabet in 2015  to help manage those two inherently conflicting agendas. In effect, Alphabet's Google division -- run by Sundar Pinchai -- serves as the cash cow that supports and funds Alphabet's "Other Bets" segment, which consists of a series of ambitious start-ups management hopes will grow into game changers in their own right over time.

To instill some much needed fiscal discipline throughout their sprawling organization, Alphabet's founders recruited former Morgan Stanley CFO Ruth Porat two years ago to the same job at Alphabet. As stated in a write-up from Fortune, Porat's marching orders were to impose some financial discipline on the company, and especially on the "smart creatives" of its innovative Other Bets units. ." Tellingly, the company has experienced a recent surge of executive departures from the ranks of those smart creatives --   precisely the kind of dreamers and visionaries who helped make Alphabet into what it is today.

Such generational changes can be a double-edged sword, and that's certainly the case when it comes to Alphabet's personality shift from quirky upstart to global power. However, the fact that Alphabet is being managed more professionally doesn't mean it has lost (or will lose) either its innovative spirit or its ability to attract top talent. The company remains a staple on annual "best places to work" lists.  It also offers its employees the opportunity to work on some of the most popular tech products in the world, as well as the chance to invent entirely new technologies.

No company is perfect, but Alphabet's track record a publicly traded operation is darn close. So while minor reasons to sell will always exist for even the best companies, long-term tech investors will be better served by remaining on focused on the big-picture narrative for Alphabet.