Google’s $5 Billion Fine and Impending Earnings Report

Earlier this week the European Commission slapped a record-setting fine on Google for unfair business practices. The commission said the company unfairly pushed its apps on users and thwarted competition.

Margrethe Vestager is the European Commissioner for Competition and she stated, “Google has used Android as a vehicle to cement the dominance of its search engine.” The commission claims that Google required phone manufacturers to install Chrome and Google Search on their devices as a condition of being able to license Google’s app store.

The commission also claimed that the company blocked manufacturers from using alternative versions of the Android operating system.

Google plans to appeal the decision and issued its own statement. “Android has created more choice for everyone, not less,” it said. “A vibrant ecosystem, rapid innovation and lower prices are the classic hallmarks of robust competition.”

This is not the first time Google has been fined by the commission and the battle between the two has been going on since the first investigation was launched in 2010. The company was also fined last year and other American companies have been fined as well—Apple, Amazon, and Facebook have also been penalized.

Because of the amount of the fine and the fact that it set a record, it garnered more headlines than a decision like this normally would. It even got the attention of President Trump who tweeted, “I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google. They truly have taken advantage of the U.S., but not for long!”

Even with the amount of the fine making headlines, it had little impact on the stock price of parent company Alphabet (Nasdaq: GOOGL). I marked the date of the announcement with the blue arrow. One reason the fine didn’t affect the stock price is because Alphabet has over $100 billion in cash and equivalents according to its last earnings report.

The most recent earnings report for Alphabet is due out on Monday after the closing bell. Obviously this event will have a much greater impact on the stock price than the fine from the European Commission.

Analysts expect the company to earn $9.64 per share for the quarter on revenue of $32.27 billion. The company has been incredibly strong financially for a number of years now and that isn’t likely to change anytime soon.

I am a big fan of Investor’s Business Daily’s EPS rating system and its SMR rating system. The EPS rating measures a company’s earnings growth for the most recent three years and especially the most recent quarters. A rating from 1 to 99 is assigned with 99 being the best. The SMR rating measures a company’s sales growth, profit margins, and return on equity with ratings from A through E with A being the best.

Alphabet gets an EPS rating of 91 and an SMR rating of an A. The company has seen its earnings per share grow at a rate of 25% per year over the last three years while sales grew by 20% a year during the same period. The company boasts a return on equity of 17.3% and a profit margin of 27%

Given this information, it’s no wonder the fine announcement had little impact on the stock price. The company has been stellar for a long time and it doesn’t look like that will change any time soon. If there is anything that would concern me, it is the sentiment toward the stock. Investors have become accustomed to Google beating earnings’ estimates and seem to expect the company to beat by a wide margin each quarter. I am also a little bothered by the fact that the short interest ratio is only 1.8 and that 38 out of 43 analysts have the stock rated as a “buy”.

All in all, I am not surprised the fine didn’t affect the stock price, but I would be cautious about buying the stock ahead of the earnings report. I am bullish on the stock for the long term, but wouldn’t necessarily jump in ahead of the report. What’s not to like as a long-term investment—the fundamentals are really strong and the price has been trending higher.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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