Today we continue our tour of the famous FANG stocks with a look at Alphabet Inc. (NASDAQ: GOOG), whose most well-known holding, Google Inc., is the world’s premiere web search and marketing service. Following a better-than-expected earnings report in fall of 2017, Alphabet’s share price surpassed the one-thousand-dollar mark, and there is no shortage of bullish sentiment to suggest the best may be yet to come.
On the down side, some of the company’s profitability metrics (such as its stagnant Return on Equity) make some analysts a little queasy.
Market Grade downgraded Alphabet Inc. from “Buy” to “Hold” in late July of 2017. Relative to other stocks in the software/services sub-industry, Alphabet Inc. has been a laggard recently. The industry as a whole grew in value by 18.36 percent over the last six months, while Alphabet is up only 13.03 percent.
Don’t get me wrong, 13 percent is not bad—the S&P 500 growth over the same period was only 7.8 percent—but with so many stocks to choose from, one can’t help but wonder if there are better buying opportunities out there.
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The Core Business
Alphabet Inc. was established in 2015 by the leaders of Google Inc. Google Inc. was absorbed as a subsidiary company under the Alphabet Inc. umbrella, and Google remains the company’s most significant holding.
Note: Google was founded in 1998 and taken public by its founders, Sergey Brin and Larry
Page, in 2004.
Google’s search marketing service, AdWords, is the financial heartbeat of Alphabet Inc. AdWords brought in 80 billion dollars in revenue in 2016, an increase from 72 billion the previous year.
AdWords allows marketers to bid on various search terms, and the highest bidders procure priority listings at the top of Google’s search engine results. Google charges advertisers by the click (anytime someone clicks on their ad), and rates range from a few cents to over $50 per click. Among the more expensive keywords are “lawyer,” “bail bonds,” and “asset management.”
In addition to the standard law firm, dentist’s office, or auto repair shop, heavy hitters in online retail like Amazon and Priceline spend tens of millions of dollars annually on search marketing through AdWords.
The rest of the core Google business is in browser software (Google Chrome), apps (Google Drive, Google Sheets, etc.) Google Maps, YouTube (a big generator of ad revenue, acquired by Google in 2006). Google also produces Android operating systems for mobile devices and, especially as of late, cloud computing services.
The distinction between this core business, aka Google, and the rest of what Alphabet Inc. does is fairly stark.
Many of the analytical breakdowns on Alphabet’s financial statements and 10-Q reports delineate between the “Google” segment of Alphabet, which includes its aforementioned core endeavors, and Alphabet’s “Other Bets” segment, which is infinitesimal compared to the Google segment in terms of revenue, but much, much more interesting.
What Do They Make at Alphabet Inc?
They make “Alpha Bets.”
The restructuring of Google into Alphabet Inc. was undertaken in the interest of giving its senior executives more selection autonomy when it came to how to utilize the company’s massive capital influence.
The trend in tech was for activist investors to really pigeonhole tech companies into focusing on areas where they were clearly and abundantly profitable. Imagine Google like you’d think of a famous band with a really popular hit song. The song becomes so popular that the band members, who are creative geniuses, end up feeling trapped and oppressed by it.
Alphabet Inc. was Google’s way of charting a new course without breaking up the band.
As Fortune magazine put it in 2015 when Alphabet Inc. was established, “…Larry Page [Google co-founder] will be able to dream.”
And dream he did.
Among the “Alpha Bets” that Alphabet Inc. placed since establishing itself as a holding company are plays in driverless cars, smart homes, anti-aging biotech, data-driven wellness, high-speed internet, and several other ventures.
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If you are considering investing in Alphabet, I advise that you immediately acquaint yourself with the term “moonshot.”
It translates literally to “launching a spacecraft to the moon.” Figuratively, a moonshot is an heroic endeavor, business or otherwise, that aims to forever alter the way we experience our life here on earth—paradigm changing.
When reading about Alphabet’s “other bets” segment, the word “moonshot” surfaces time and again. A visit to the Google X home page reveals that this experimental arm of Alphabet Inc. self-identifies as a “moonshot factory.”
Definitely cool, but what does all this mean for your portfolio?
A Philosophical (as well as Financial) Investment
To invest in Alphabet Inc. is to invest in both a marketing behemoth and in some of the world’s most gifted entrepreneurs and their visions for the future.
From a financial perspective, keep in mind that the latter half of the segment, the “other bets” category, currently accounts for only 2 percent of Alphabet’s revenues. Also be mindful of the fact that not all “other bets” endeavors remain permanently attached to Alphabet Inc.
Some, once they reach maturity, are emancipated, so to speak, from the mother holding company and are reestablished with a new capital structure. Philosophically, Alphabet Inc. appears focused on impacting the future and establishing thought leadership, more so than hoarding properties.
From an investor’s perspective, Alphabet Inc. offers access to the profits of the world’s most vibrant and thriving marketing ecosystem, while continually staking out turf and nudging along the big ideas that are poised to disrupt today and define tomorrow.
The price of admission is steep.
At $1,000 per share, Alphabet Inc. is one of the most expensive stocks on the market. And bigger shorter-term returns for your dollar are surely available elsewhere. But if you enjoy riding along on the great arc of human progress and maybe making a little money along the way, Alphabet Inc. is worth saving for.
DISCLOSURE: I own shares of Alphabet Inc.
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This article is a part of our ongoing series that explores a different stock or fund each week. The information contained herein should not be construed as ‘financial advice’ and is presented as the opinion of the author.
ClydeBank Media does not offer financial investment services and has no ties to any of the funds presented in this list. Please see our full financial disclaimer regarding the information contained within this stock analysis. Always consult your financial adviser before making investment decisions.