If you are someone who has no time to research companies, but still want to enjoy the growth in various technological sectors that are booming, then today’s article is for you. Today, we want to bring your attention to Google stock, or more correctly, its parent holding company, Alphabet.
Because, we believe that it is the Berkshire Hathaway of the internet and technology. Though it can only be proven with time, we think Alphabet has what it takes to do just that.
Let’s see why will the company be able to not only 2x but potentially 10x in the future.
Limited Growth Prospects For Google Stock?
First, we recognize some of the phenomena that you may observe recently.
Source: Yahoo Finance / Alphabet Inc.
Well, first of all, we saw the stock soaring to all-time highs above $2000.
Source: Dataroma / Alphabet Inc.
And many funds actually offloaded some of Alphabet’s shares recently.
Source: Macrotrends / Alphabet Revenue 2006 – 2020
And not to mention analysts’ prediction that the company’s growth will slow in the coming years.
Source: Yahoo Finance / Alphabet Inc Growth Estimates
These concerns are not invalid. But, should that deter us from investing in Google’s holding company, Alphabet?
Google Stock Business Financials
Well, let’s go back to the fundamentals.
We will not go into the details of the financials, but i want to highlight some key points so that you can understand Alphabet’s positioning as an investment company.
First, let’s look at the company’s earnings power.
Source: Alphabet Inc FY2020 Annual Report / Consolidated Statements of Income
Observe that the group generates a huge revenue base of $182 billion for the full year of 2020.
Of which, after deducting the costs and expenses, income from operations come down to about $41 billion.
On top of that, the group’s investment and acquisition activities in other companies generate additional income. These are classified under the “Other income” section of around $6.8 billion, which we will cover more later.
Adding this to the operating income, we see the company’s total income come out to $48 billion, and an after-tax net income of around $40 billion, and earnings per share of $58 for the full year of 2020.
Source: Alphabet Inc FY2020 Annual Report / Revenues Breakdown
Just so you have a full picture, Alphabet segregates its reporting into 3 key segments. Google Services, Google Cloud, and Other Bets.
Observe that Google Services is the key contributor. In fact, it is the only profitable operating segment out of the 3, as you will see later.
Of which, revenue from Google Services is contributed by 4 sub-categories. The first 3, Google Search, Youtube ads and Google Network Members’ properties, are mainly advertising revenue related to what we are all familiar with, its Google search engine, as well as its online video platform, Youtube.
The 4th sub-category of “Google other” is related to its Android operating system, Google Play for sale of apps and in-app purchases, hardware such as Pixel phones, Youtube non-advertising revenue and other products and services.
Now you can understand the strong earnings power of Google Stock coming mainly from its Google suite of products. And these cash-generating machines will form the base for its investment ventures in the future.
Business Economics And Market Positioning
Google Search Engine
Source: Statista / Worldwide desktop market share of leading search engines from Jan 2010 to Jan 2021
But before that, just a quick one. For the complete picture, I want to state here that Google search engine has been dominating the market ever since its introduction. It has been maintaining its market share of 90% throughout the years of its history.
Such monopolistic power gives the company the pricing power to charge businesses some substantial amount of advertising dollars.
Android Operating System
Source: Statista / Mobile operating systems’ market share worldwide from January 2012 to January 2021
Then, we also have the Android mobile operating system. Although the Apple brand and its iOS seem to be on top of consumers mind, Android operating system continues to dominate the market share at 71%. On the other hand, Apple’s iOS coming in in the second position with a 27% market share.
Source: Android / Featured Brands
That’s because Android’s operating system not only powers its own Google’s Pixel phones, but also mobile phones and tablets of other companies, most notably, Samsung, LG and Motorola among those big brands.
And of course not forgetting, Youtube, the 2nd largest search engine in the world. It has more search volume than Bing or Yahoo, more than twice Amazon’s and three times Facebook’s.
Source: CNBC / Alphabet revenue up 23% as core advertising business shows strong growth
And Youtube is currently driving the company’s growth. You can see from the latest Q4 2020 earnings report that Youtube ads revenue grew a substantial 47% compared to the Q4 2019. As for the full year of 2020, Youtube ads grew 30% to $19 billion from $15 billion in the previous year.
Actually, I think that the Youtube ecosystem can be an even stronger business in times to come. Because, the platform is creating a self-fulling network effect.
As there are more and more users, more views and more watch time, we have more creators developing more and higher quality content. This in turn attracts more views and watch time.
These video contents generated are very native to the platform. Each and individual channels have their own subscribers, own audience and fans. Unlike e-commerce where sellers can replicate their product listings on multiple third-party marketplaces, youtube creators will not be able to port over to other channels of content distribution without losing its audience.
So i think youtube has one of the strongest and most powerful network effects among the businesses i have seen so far.
Strong Business Moat
So, yes, concern of the company’s declining growth rate in the near term, due to the limited space that Google’s search engine can expand into, is value.
This is true given its already dominant presence and widespread usage of search engines around the world.
However, their business economics will continue to remain strong as discussed above. This will allow the company to generate huge amount free cash flow for Alphabet to deploy to other ventures.
And that is what we are looking for.
Google Stock Strong Balance Sheet
Source: Alphabet Inc FY2020 Annual Report / Consolidated Balance Sheets
Take a look at Alphabet’s balance sheet. Its long-term debt is just $14 billion as at the end of 2020. Whereas, its liquid assets, in another word, its cash and marketable securities stand at a whopping $137 billion. Meaning, the company can easily pay off its debt anytime.
Ability To Invest For The Future
With such a strong financial health and business economics, it is no wonder why the company can continue to forge ahead with its aggressive investments in various ventures and emerging technologies.
Source: Alphabet Inc FY2020 Annual Report / Revenues and Operating income (loss) Breakdown
For instance, although Google Cloud’s revenue registered a 47% year-on-year growth in 2020, it is still incurring losses of about $5.6 billion.
Similarly, Alphabet is investing substantially in other non-Google businesses, classified under its “Other Bets” segment.
For example, the company’s investment in Waymo is pushing the frontier of autonomous driving technology. Its investment in Verily is focused on developing technology for better health management and disease prevention.
All these short-term losses are possible because of the company’s core businesses in Google. They are able to provide Alphabet the cash to invest in new technologies.
And here we are just scratching the surface. Alphabet has a myriad of subsidiary companies.
Google Stock Investment Ventures
Source: Alphabet Inc FY2020 Annual Report / Consolidated Statements of Income
Remember the “Other income” component, these are generated from Alphabet’s equity investment in a huge range of companies.
And they are primarily invested under Alphabet’s various investment arms like Google Ventures, Google X and Google Capital.
They are involved in funding various companies at different stages of their business cycles, whether they are in the earlier stage of development, or the later stage of funding, or projects classified as moonshots that can create huge breakthroughs and impacts.
We will not go through all the companies or investments that Alphabet has made.
Source: Google Ventures / Portfolio Consumer
Source: Google Ventures / Portfolio Enterprise
But just to give you an idea of the scale and reach, these are some of the few higher profile companies that Google Ventures has invested.
Source: Google Ventures
All in all, Google Ventures itself already has 300 active portfolio companies. Of which, they have helped brought 36 of them public successfully.
Inspiration From Berkshire Hathaway
Source: Markets Insider / Google’s founder visited Warren Buffett more than a decade ago – and were so inspired they modeled Alphabet on Berkshire Hathaway
As a matter of fact, Google founders Larry Page and Sergey Brin were inspired by Warren Buffett’s Berkshire Hathaway.
The learned the beauty of creating a corporate scaling mechanism, having companies running independently. Each with strong CEO, independent operation, and strong branding of its own.
This will free Larry and Sergey to focus on the big picture and allocate capital across the conglomerate, just like how Buffett runs Berksire.
Source: Barrons / Google Parent Is Buying More Stock Even as Others Step Back. Why That Matters for Investors.
In fact, Alphabet already started to adopt a very Buffett-like strategy, of repurchasing its own shares when opportunities arise. This has generated substantial shareholder values.
For example, the company spent a record $8.5 billion in their stock repurchase programs during the first quarter of 2020, when Covid-19 outbreak caused a huge market correction in its stock price.
And this makes it very clear that Alphabet’s objective is very well aligned to its shareholders’.
Distinctions Of Google Stock, Alphabet, As An Investment Company
But of course there’s few distinctions among the two investment companies. The most obvious being Alphabet’s focus on its continuous push of technological frontiers. Conversely, Berkshire has been avoiding the tech sector generally, and investing only in proven and profitable companies.
So Alphabet will be very different, but I think it can potentially be a very powerful investment vehicle. And more so than Berkshire as an investment company in the future.
The way to visualize this can be illustrated from Jeff Bezos explanation of innovative businesses. He says, “The difference between baseball and business, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while when you step up to the plate, you can score 1,000 runs.”
And that is what Alphabet is doing exactly. They are placing smart bets and investments in potential businesses. At the sometime, they are leveraging on its own established technologies, albeit short term losses and failures along the way. But a few big successes will more than compensate for all other failed experiments.
So, if you want to invest in Berkshire so that you can free yourself from researching companies yourself. But still want to ride on the technological waves, and potentially generate better returns. Then Google’s parent company, Alphabet, is your pick for the next decade.
This is just like nobody knows that Amazon’s Cloud Computing business will now contribute to more than half of Amazon’s profit, even though e-commerce is the company’s main business and revenue arm.
What we need is the right systems and culture of innovations, as well as the willingness to experiment. Especially with strong core businesses like Google generating substantial free cash flow for the company to fund these potentially high returns projects and businesses. Those growth elements, that were once unimaginable, will be discovered along the way.
That’s why Alphabet can potentially 10X in value over the long haul, if you look at it as an investment company.
But of course investors should continue to follow Alphabet and monitor its progress and track record as an investment company. We need to ensure that the group is allocating capital efficiently.
So, I’m definitely adding Alphabet to my portfolio, and more during market correction.
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