Should Google Investors Worry About the Trillion-Dollar Curse?

Alphabet Inc. (NASDAQ: GOOGL) – street name Google – reported blowout fourth-quarter financial results yesterday. Everything meaningful was up double-digits year-over-year: earnings up 30%, EPS up 28%, revenue up 18%. What’s more, everything was up more than most everyone expected.
Alphabet shares, in turn, were up as much as 5% to hit a new all-time high. In fact, the new all-time high was so high it made Alphabet the world’s most valuable company. Alphabet’s new-and-improved market cap lifted it over the former No. 1, Apple (NASDAQ: AAPL).
If Wall Street likes anything, it’s a surprise. Stifel Nicolaus raised its Alphabet price target to $930 from $900. Oppenheimer raised its price target to $965 from $822. Deutsche Bank (NYSE: DB) went all in, pumping its price target to $1,080 from $900. Barron’s reports no fewer than eight immediate Alphabet price-target upgrades. More upgrades are sure to follow.
Amplified chatter of Alphabet becoming the first trillion-dollar market-cap company is also sure to follow if these price targets are achieved. When someone new takes poll position in the market-cap race, speculative fervor rises: Will the new guy on poll, in this case Alphabet, finally be the one to hit a trillion?
Google investors in it for growth hope that the fervor subsides. If past is prologue, the future isn’t pretty when talk turns to the trillion-dollar chimera.
Microsoft (NASDAQ: MSFT) was the first company to see its market cap exceed $500 billion, in late 1999. Given the immense popularity of most everything technology related, pundits speculated that it was only a matter of time before Microsoft’s market cap exceeded $1 trillion. But just as the speculative fervor hit its crescendo, Microsoft ran out of steam.
The focus then shifted to another company with a $500 billion market cap, Cisco Systems (NASDAQ: CSCO), which was still maintaining an upward trajectory. But then the inevitable occurred. Like Microsoft, Cisco lost momentum and its share price spiraled downward.
A decade later, Apple resurrected the $1 trillion chatter. The first time occurred in 2012, when Apple’s market cap topped $500 billion. Apple shares subsequently sold off nearly 40%. But then they rallied. By early 2015, the Apple rally had lifted its market cap to $750 billion. No less of an investor than Carl Icahn was calling for $1 trillion in the near future.
Then the curse hit. Apple’s shares peaked at $134, only to subsequently drop 30%. Today, Apple’s market cap is nearly $500 billion shy of $1 trillion. No one uses “Apple” and “trillion” in the same sentence anymore.

Can Alphabet Reverse the Curse?

Now it’s Alphabet’s turn. At least it will be if remains on Wall Street’s expected trajectory.
Like Microsoft, Cisco Systems and Apple before it, Alphabet’s growth appears unstoppable. Google Search easily remains the No. 1 search engine, with 75% of all searches. Google Search is even more dominant on mobile searches, with 78%. The Google segments Android, Maps, Chrome, Google Play and Gmail each reported over 1 billion users during the fourth quarter. YouTube, another Google segment, saw 74% year-over-year growth, accelerating from the previous quarter’s 65% growth, according to Citigroup (NYSE: C).
The narrative paints an unstoppable future, except for the fact that everyone is stoppable. Microsoft and Cisco Systems proved that to be the case 15 years ago; Apple proved that last year.
When you reach a certain size, laws of economics begin to work against you. The laws worked against Microsoft, Cisco and Apple. They will eventually work against Alphabet.
The laws are predicated on opportunity and competition. The larger you are, the fewer high-return projects that avail themselves. Elephants are less prevalent than mice, and it takes elephants to keep the needle moving once you’ve reached a certain girth (just ask Warren Buffett).
The more profitable you are, the more fierce the competition. A basic law of economics is that superior margins and earnings growth will attract the fiercest competition. In turn, the fierce competition will drive down superior growth to the mean.
The good news for income investors is that dividends frequently take flight once stratospheric growth returns to earth.
Microsoft, Cisco and Apple have all morphed into first-rate dividend growers. Though I’m not predicting an imminent return of Alphabet’s growth to sub-stratosphere levels, a $550 billion company trading at 37 times earnings will have to flap mightily to stay aflight. When Alphabet eventually returns to earth, though, it has plenty of cash – $73 billion – to morph into a first-rate dividend grower.
For growth investors, talk of a trillion-dollar market cap could prove a curse. For income investors, it could prove a blessing.