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Does google outage create a demand outage for its stock?


Dear Investors,


Most of you would have experienced or read about the much touted 97 minute outage on Google and all its ancillary services- be it Gmail, Google docs, Google analytics Data centres and infrastructure, Google Assistant, Google search, Google Pixel, Google Cloud, Google Play, Google Maps, Youtube, Instagram and ...................”Google Stock prices”.....well stock prices not in real time as the outage occurred early morning US time around 6.30 am EST, but later in the day, when the trade opened, the market reflected it.


While the stock price movements attributable to the outage may not be easy to pin point due to the volatility of the stock price for reasons other than outage. The stock prices of any given listed company moves with in a certain daily range, the movement today in google’s had an extra element of volatility not owing to the systemic daily movements and it is definitely over and above the regular noise related inherent volatility too - this fact will not be going unpenalized by the option traders (on both sides of the long and short divide). Did you ask why? Its because the market mechanism puts a certain range within which and the number of times within a certain range count wise, a given stock price moves intra-day. the rest of the movements are not systematic and hence qualify for impacting the stock prices, its demand and supply by reflecting that in the price and uplift to the price (stock's alpha - which measures if the stock is over/under priced).




Today Google has been hit by something that is not a frequent event and is thus an ENID (Events not in past data, or atleast not with a frequency that can be predicted for any valid return period of that same event) and thus it will impact the technical price of this stock adversely, how? Since the built-in volatility falls short of the actual volatility, owing to external factors like outage, which takes its toll on the reliability and credibility of the Google brand.


The effect might not be great, if measured on the stock price alpha becoming bigger (which means the stock is overpriced and hence not a good buy), but if one looks at the impacts on the exotic instruments, that would be more pronounced and easily discernible on the options that have google stock as the underlying asset, especially the ones which are 'in the money', the traders who had shorted their position on google for today, would be the ones who might benefit the most, and the ones who were long on the google stock with today's delivery, would be at a more pronounced disadvantage, compared to their stock holding counterparts.


This means that the risk on google stock is greater than what the market thought and this will enter into the google stock pricing via its alpha, which shall rise and shall reflect in the corresponding fall in its yield (returns to price ratio) and thus translate into a fall in demand.

While this is the mathematical/technical bit, let me explain that to you from a business angle or the fundamental bit too.


The google is no more your plain search engine, its transformed since its launch into a mega lifeline of many a commercial and personal users who rely on google and its ancillary products and services for carrying out their personal and commercial activities that generates their income stream, and hence makes google an in demand service/products providers – so its no different to any of the other business models, looking into the core of it all.

Now if google were to become less credible and falter on the service agreements/contractual obligations to keep the show running, then it will be a breach of the contractual provisions, which may attract financial and reputational penalties, this mean an adverse cashflow situation, and also loss of some customers, who may try and find a better alternative to google.

Plus google will run its net additional investigation into what caused the outage, it might reveal some decay in its server/other ecosystem, which will need to be fixed, meaning, need money to be spent from its cash reserves to come back to the same level of reliance as it used to have in the past, so this is also an adverse cashflow situation, which will mean google has less cash then what it had yesterday and this cash spending is not generating another revenue stream but is only aimed at maintaining the existing revenue streams from deteriorating. So this event does not contribute to a rise in capital/equity, but only causes lower cash reserves, making the company less valuable relative to its position 12 -24 hours in the past.

This my friends, is called demand shrinkage and this is where the future income will reflect a similar shrinkage, I am talking about the medium to long run here, but think about those options and derivative traders that were long today on google stock as the underlying asset, they will definitely avoid the options and other instruments with google as the underlying stock for atleast tomorrow, if not for a longer period of time and this is also a demand shrinkage, albeit its instant.




Both the long term and the short-term demand shrinkage will affect the google price, as something which is less valuable than yesterday will be marked down by the market, and how? Via the stock alpha route, its all automatic, allow me to explain - the outage makes google stock less in demand/valuable immediate term, short term, medium term and long term (we are not discussing here the quantum here, only the direction) for the business reasons I just discussed above.

If the stock price was to remain the same on the bourses, while the actual price that the company can fetch is lower than the listed price, it can be called “over-priced” or “over-rated” and this makes its alpha go up, all the seasoned value investors will check the alpha, most will only buy those stocks whose alpha is either 0 or negative, and here for google, due to the rise in its alpha as discussed, it will have increased and thus be either positive, or less negative relative to what it was yesterday and hence less desirable for a “buy” recommendation relative to yesterday. When the “buy” recommendation become less vocal, the demand reflects it by going down, and when the demand goes down the stock prices come down via the demand-supply classical economic principles.


Still don’t agree? Read on the link from CNBC, on how google outage inconvenienced the private and commercial google users and how they are looking into the service level agreements and how they might even change their dependency, which at the moment might be entirely on google, in favor of the other similar service/product providers..


https://www.cnbc.com/2020/12/14/googles-youtube-gmail-and-drive-services-suffer-outage.html

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