Shares in Alphabet have come under a good deal of pressure over the last year as investors process the implications of increasing regulatory scrutiny, culminating in reports this month that the U.S. Department of Justice (DOJ) is preparing for an antitrust probe into big tech. In this short piece, we explain why we believe Alphabet is appropriate for our Quality Strategy as an extraordinary company under a temporary cloud. Markets hate uncertainty; we believe that today’s price discounts the loss of an antitrust case and that this presents us with a long-term opportunity.
The advertising industry has been through one of its periodic bouts of transformation over the last two decades as marketers followed media consumption onto the internet. The digitalisation of advertising has led to explosive growth in revenues for the internet properties that offer a combination of user numbers and user knowledge. Alphabet has carved an enormous market share in recent years; in 2017, Alphabet accounted for about 50% of the global market for digital advertising.¹ Alphabet’s revenue growth has decelerated to a degree, but digital advertising remains a growth opportunity, even as others enter the space.
While it is tech companies’ knowledge of their users that makes them so attractive to advertisers, they shoulder a good deal of responsibility to use that data ethically. At the same time, the sheer volume of online content brings political baggage and the ability for bad actors to participate in the market for minds. Repeated blunders at Facebook in particular have brought the sector into the political crosshairs.
At the beginning of June, the Wall Street Journal broke the news that the Federal Trade Commission (FTC) and the DOJ had agreed to carve up oversight of the tech giants between them. It is understood that the FTC will cover Facebook and Amazon while the DOJ studies Google and Apple. Investors are fretting over the possibility of antitrust probes on the sector, and shares of Alphabet at the time of writing were 16% below their recent peak.
GMO’s Quality Strategy has a preference for good companies where a temporary cloud has led to a lower than warranted share price. The challenge is separating the temporary clouds from permanent impairment and doing so in real time. Alphabet is an interesting case study.