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QuestionsCategory: Business QuadrantUnderstanding Annual report for Alphabet: Risks
redvolver asked 2 years ago

Hi coaches and all
In the midst of understanding the 2019 alphabet annual report…
Under the risks part, alphabet has stated a very comprehensive list of all possible risks.
How do you all decide which one is wroth looking at ?
From my perspective, I just only take more notice of the ones that may affect their main ad business or their growing cloud revenue
Is that how u all do so as well?
Else it seems that the business has too much risks to consider.
Thank you in advance!

2 Answers
Victor Chng answered 2 years ago

Hi Redvolver,
US companies have very comprehensive annual report and they are required to state all the possible risk to prevent being sue by shareholders. Hence, you are right that not all the risks are worth looking at.
I will usually ask this question: If this risk will to happen does it affect the companies revenue or earnings significantly? If the answer is yes then I will take note of it. 
Based on the question above, you may want to share which are the risks that you think will affect Alphabet. I will give you my inputs from there. 

redvolver replied 2 years ago

Hi Victor

Based on my research and past news, here are my findings and opinion on important risks.

Risk 1: Competition

The market share of digital ad remains strong for a few years for alphabet (about 29% in US in 2020). But a small note that Amazon is picking up real fast (~ 10%). So this segment must monitor
Alphabet search engine remains the most popular (~87% in world usage, 95% in US ) so no issue.

Risk 2 : Data privacy and security

The following events of data privacy and security breaches seem to have little to no impact as well but to monitor as in future there may be more serious consequences

2018 Google data breach -market only fall 1%, goggle plus shut down. No impact as not much users on G plus

2019 European data privacy law – Google fined 57 million

French Data Protection Authority cookie privacy – fine again

Risk 3: anti trust laws

This is the biggest threat so far as there are always lawsuits and ever evolving policy against the tech companies. Worst case is to see alphabet break its business.

2013 US Federal Trade Commission 2 yeqrs investigation – inconclusive
2017 EU anti trust for shopping comparison websites – Google fined for 2.4 billion euros
2018 EU 3 years long antitrust regulation – Google fined 4.34 billion euros
2019 Ad-Tech Antitrust Case in France – nearing settlement in 2021, most likely fine
2020 US Department of Justice anti trust lawsuit: to monitor as proceedings will only start in 2023
2020 Digital Markets Act and Digital Services Act – New policy to level competition – to monitor as Act only effective from mid 2022 / 2023

Risk 4: Key man risk

Sundar Pichai is pivotal to the overall management of Alphabet.
But Co founders Larry Page and Sergey Brin can exercise their 50% to assume back operations if Mr Pichai is ever headhunted or decided to leave.

Risk 5: Possible decreasing operating margin

Margin will be affected if there are larger percentage of advertising fees, TAC, content acquisition costs, infrastructure costs pertaining to their ad business

To be monitored in Financials

Do let me know if I am correct so far. I may miss out more as I am still figuring out the whole ad industry.

Victor Chng answered 2 years ago

Hi Redvolver,
you have stated all the correct risk that may affect Alphabet except risk 4. I don;t think it is much of a risk as they can always headhunt another CEO for Alphabet. 

redvolver replied 2 years ago

Just a bit paranoid for risk 4 as he is the poster boy for quite some time. Ok will take note. Thank you Victor!

Victor Chng replied 2 years ago

Welcome redvolver :)