Investors recently have rushed back into positions in some of the world's most established and dominant businesses. That's certainly been the case with Alphabet (GOOG +0.44%) (GOOGL +0.66%).
This tech titan's price has soared by about 60% in just the past 18 months -- a gain that well exceeds what the Nasdaq Composite index has put up. A combination of favorable market conditions and strong fundamentals have helped. But before you rush out to buy this "Magnificent Seven" stock in hopes of riding the momentum, you should be aware of these three big risks.
1. AI and search
Alphabet's business was built on the massive success of Google Search. This remains the company's crown jewel, generating 57% of revenue in 2023. It has made the company incredibly successful from a financial perspective, while also making Google a household name.
This business model depends on users entering various queries, to which Google would display links, registering ad revenue in the process. But the growing use of generative artificial intelligence (AI) systems could significantly change how people seek and find information online -- at least, that's what some people believe.
AI-powered chatbots like ChatGPT and Alphabet's Gemini provide conversational answers to user queries. If a user doesn't need to scroll through pages of search results for a specific answer, it severely limits the ad inventory Google can display. This would negatively impact the company's ability to register lucrative digital ad revenue.
Alphabet's relative lack of revenue diversification makes this potential threat a serious concern, and one investors should keep tabs on.
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2. Regulatory issues
Like all of its big tech peers, Alphabet is always on the minds of regulators who seem to want nothing more than to limit the company's power and influence, particularly in a world that is becoming increasingly digitized. Data is the new oil, and Alphabet probably has more data than any other enterprise on the planet.
How the company collects, uses, and sells that data is what regulators seem most concerned with. If Alphabet gets caught slipping up in some way, regulators will certainly come down with heavy fines.
The business also owns and operates some of the most widely used internet properties. Lawmakers don't like companies that exhibit monopolistic power, as they believe it hurts the consumer. Google Search has greater than 90% global market share, and regulators believe that the company abused its power to get to this position. Alphabet is currently in the middle of a trial related to this allegation.
Because the company produces tens of billions of dollars in free cash flow year in and year out, it definitely has the financial resources to pay any fines and penalties that come its way. However, should regulators take drastic actions, Alphabet's strategy and structure might be altered.
3. Waiting for moonshots to pay off
Alphabet has vast financial resources that allow it to invest in high-potential, but high-risk, areas in pursuit of technologies it hopes will be the "next big thing." The company is working on a number of these so-called moonshots, all aiming to solve some of the most complex problems that the world faces.
There's Waymo, which is focused on bringing autonomous driving technology to the masses. Google DeepMind invests in and develops AI and machine learning capabilities. Verily aims to innovate in the health and life sciences industry. And there are many more.
The units housed under its "other bets" segment generated just $1.5 billion of combined revenue last year while posting a $4.1 billion operating loss. Because of Alphabet's size and strength, these losses hardly make a dent in its financial condition. The issue, though, is that these projects might never result in any level of success that moves the needle. And they are likely to continue taking up management's time, effort, and attention.
To be clear, Alphabet is one of the world's greatest companies, and it has handsomely rewarded its long-term shareholders. But investors need to understand the risks to its business before putting money into its stock today.
