Privacy Issues Will Weigh Heavily On Google's Recent Gains

| About: Alphabet Inc. (GOOG)

On the internet, people want to feel secure. This makes it troubling that Google (NASDAQ:GOOG) has encountered so many problems recently related to privacy issues. Surely, this is not the first time investors are hearing about this with the company, but one has to wonder when it will catch up with Google in a major way. I do not think Google is doomed by any means, but I do think investors should be cautious about investing in the company. Despite recent gains, I am hesitant in recommending Google stock.

Google recently jumped up $8 to $677, and has a trailing P/E is 20.07 and earnings per share of $33.73. Google is trending upward at the moment, but I do expect that to change with the recent news surrounding the company.

Google has shown solid revenue growth so far in 2012. Revenue and gross profits have climbed each quarter, and the first quarter of 2012 ended with Google declaring over $6.8 billion in profits. Its profit margin is still above 25%, a healthy number that suggests even if the share price drifts back downward, Google will still be a major player to back. With that said, I don't think the stock will go much higher. Recent news involving privacy issues should be a bit of a concern for investors.

Google has evaded privacy settings on Apple's (NASDAQ:AAPL) Safari browser, and as a result, Google must pay a $22.5 million fine. For a company with $2.9 billion in income after tax last quarter, this is not such a huge financial hit, but this is still the largest single-company fine from the U.S. Federal Trade Commission (NASDAQ:FTC). While it will not make a big difference in financial terms, this will continue to hinder Google's reputation. Google claims, "We do set the highest standards of privacy and security for our users," but this appears to be all talk. Web users will not be happy to hear about more privacy issues, and this may push some Google users away to other options.

This is not the first time the FTC has had problems with Google either. Over the past few years, Google, Facebook (NASDAQ:FB), Twitter, and Myspace have been charged with privacy and data-security violations. These did not result in fines, but instead, each company signed 20-year consent decrees over future actions. Google signed its consent decree in October 2011, so it did not even make it a year before encountering problems. It also received a small fine in April for privacy issues with its Google Street View. By comparison, the other companies signing consent decrees may not look so bad anymore. In my opinion, Google is beginning to secure its place as one of the worst companies when it comes to privacy issues.

Microsoft's (NASDAQ:MSFT) Bing has openly criticized Google about its privacy policies, claiming that this has allowed Bing to make great head-way in the market. I think Bing has certainly exaggerated its success, but I am certain that the privacy issues have not helped Google in any way. Especially with the recent fine, investors will be more open to believing Microsoft's claims. Aside from increased market share, Bing boasts that its "overall relevance" is finally higher than Google's by 1.5%. Of course, this seems to mean almost nothing, as it is not clear how "relevance" was even measured.

I think this is mostly just a lot of talk from Bing, but I do think Google's continued privacy issues will make Bing a better alternative. Microsoft has been trading around $30, though it has been trending slightly downward, and I do not expect Google's misfortune to stop this. Still, Microsoft brought in $5.1 billion in income after tax last quarter and has profit margins as healthy as Google. However, analysts are predicting a lower revenue total for this coming quarter, perhaps in anticipation of Windows 8, and so I do not recommend buying Microsoft quite yet.

There is more going on with Google's privacy settings than a simple fine, however, as its March privacy policy changes continue to be investigated by France's Commission nationale de l'informatique (CNIL). The CNIL expected to make a decision in June, but new information from Google has postponed this until September. With the recent fine over privacy issues, Google may appear quite vulnerable to investors, especially since the CNIL investigation could lead to financial penalties as high as 300,000 euros. It could also lead to administrative sanctions.

I think the recent fine will make investors more concerned about this investigation, and lower investor confidence will have a negative impact on the stock. Aside from this, however, I think investors have every right to be concerned. Google needs to start taking these privacy issues more seriously to avoid such needless losses.

Yahoo! (NASDAQ:YHOO) is currently facing a lawsuit over privacy issues, making it appear to be no better than Google. Some California residents have filed lawsuits, claiming that Yahoo! illegally intercepts emails non-users when they send messages to user emails. These are for the purpose of advertisements, but it is still unsettling that Yahoo! may be gaining information from non-Yahoo! users. There seems to be little privacy protection going on.

Yahoo! is not the only company involved in this case though. Not surprisingly, Google is the other company coming under fire for this. Therefore, this may not be such bad news for Yahoo! when everything is considered. It may be facing some problems with privacy, but Google is facing the same problems and many more. I still expect Yahoo! stock to drop a little, especially being at such a high price, but I think Google is the one that will certainly be taking the bigger hit from recent privacy issues in the industry.

Despite its recent gains, Google is certainly looking questionable at the moment, as it continues to encounter privacy issues. The financial repercussions may not be so substantial for a huge company like Google, but as it continues to have privacy issues, web users may begin to move further and further away from the company. Yahoo! is not free from issues either, but its news is quite minor when compared with Google. While I do not recommend Yahoo! or Microsoft at the moment, I would also urge investors to use caution when investing in Google, at least for the time being.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.