Google, Does The Stock Have A Problem?

Last week shares of Alphabet/Google lost about 4.5% per share thanks to the YouTube ad content controversy.

The issue started a week or so ago when major advertisers ranging from the government of Great Britain to global corporate giants like Amazon and Microsoft started reducing their ad purchasing from YouTube after appearing alongside videos promoting anti-Semitism, terrorism and racist material.

Google has apologized and changed its policies to combat the issue although the Wall Street Journal stated that the ads were still running alongside the objectionable content on this past Thursday.

Early last week Pivotal lowered its rating on Google/Alphabet to a Hold from a Buy on concerns about lowered ad spending by clients.

On the flip side, Morgan Stanley maintained its Overweight rating and kept its $1,000 per share price target unchanged saying that while the controversy is a "real issue," investors should consider buying the shares on a dip. Well, we have had a 4% dip last week.

Also, Pacific Crest issued a note that said that the issue is temporary and could be resolved soon. The analysts there said that the issue facing Google is systemic and not company specific and that digital advertising ha story and is tackling the problem.

The firm's analysts added that they do not expect any material impact on advertising revenues for Google and that their estimates remain unchanged as did their Overweight rating and $1,040 price target.

So, the question is whether the $37 per share slide in Google stock last week has fully factored in any potential adverse impact from the fallout?

Given the fact that even using a worst case scenario from the YouTube fallout, earnings could be impacted by a maximum of 1%, I would say a $22 billion or so hit to the market cap is more than enough already.

Maybe, an overkill even.

However, till Google fully solves (not an easy fix given the massive amount of user generated content uploaded to Youtube hourly/daily) and publicly addresses the situation and maybe announce that a client or two are back, Google shares could remain vulnerable, especially if the markets remain tilted to the downside like they were last week.

Simple as that?

Yes, simple as that.

Shares of Google closed at $835.14, down $4.51 on the day and down $37.23 for the week, on Friday, March 24, 2017.

(Long googl, amzn, long and short options on both)

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