Alphabet Sees Future Beyond Google

Alphabet Sees Future Beyond Google

Price $2,824                      Growth Holding                       October 22, 2021

  • 4th largest company in the world.
  • 1st and 2nd most visited websites yearly, with both Google and YouTube dominating global web traffic.
  • Extensive R&D, history of delivering new and successful products.
  • Increasing shift away from just ad revenue, breaking into the internet service provider market, cloud computing, AI, phones, and others.
  • Regulatory and legislative scrutiny could slow growth and increase costs.

Investment Thesis

Alphabet (GOOG), more commonly known as Google, is the fourth-largest company by market capitalization and has a dominant global market share for search, videos, email and maps. They also have Android software for running mobile phones.

Alphabet has never been afraid to try new things, with their acquisition of YouTube, Fitbit, and internal developments famously leading to their Pixel phone line, Google Fiber (an ISP), and DeepMind (AI). So while Google has likely left its explosive growth phase, we believe that it is an excellent choice for capital appreciation.

Products and R&D

Alphabet started out of the globally recognized Google search engine.  Now the total company is known as Alphabet  and has 13 subsidiaries

CapitalG is a private equity firm specializing in growth-stage technology firms. In addition to providing funding, CapitalG also offers advisory services to those growth firms, including access to Google’s engineers and technology. CapitalG’s famous ventures include Duolingo, Snap, Stripe, Airbnb, Lyft, and Robinhood. GV is the seed stage counterpart to CapitalG, providing early seed money to aid companies in moving to the growth stage.

DeepMind specializes in artificial intelligence development, made famous when it became the first computer to become better than a human at the notoriously difficult game Go. DeepMind is also being used for medical advances, including modeling.

Fitbit was a bolt-on acquisition by Alphabet in 2021. It was then absorbed into Google, where it will presumably be used to manufacture Pixel branded smart-watches to compete in the high-end wearable market with Apple.  

Google Fiber is an initiative started by Google to implement faster fiber optic internet in underserved areas. In just 10 years, it has accumulated over 60,000 TV subscribers and over 450,000 broadband customers.

Calico is a biotechnical firm specializing in combatting aging and diseases resulting from aging. Alphabet acquired it soon after its inception, and Calico has had several successful partnerships with AbbVie, the University of Texas, AncestryDNA, Harvard, and MIT.

X Development is a research and development facility, which maintains a level of secrecy about what it is currently working on. In the past, X Development has worked on Google’s self-driving car prototype, the failed Google Glass, energy storage methods, energy generation research, and things that would become part of Google and other Alphabet subsidiary’s main offerings.

Sidewalk Labs is an urban research institute headed by the former chief executive of Bloomberg. Its goal is to make urban living more tolerable through technological solutions to the cost of living, transportation, and energy.

Risk

Alphabet is one of the companies at the center of the anti-trust question looming over Facebook, Apple, Amazon, Google, and other social media companies. While we don’t believe that anti-trust probes will lead to the breakup of Alphabet, it is something to consider.

Alphabet is not afraid to take risks, which can yield both ground-breaking products and a loss on the balance sheet. We believe Alphabet exercises the utmost fiscal responsibility regarding these developments, but it is also worth noting.

Metrics

Alphabet has seen a massive 164% increase in net income in 1H21 year over year. This was driven partly by a recovery and by Google Cloud (Google’s response to AWS), which saw a revenue increase of 54% year over year. In addition, some of the largest customers like PayPal, Adobe, Wisconsin, the MLB, and Vodafone have significantly expanded online operations. Additionally, significant increases in ad revenues with the rollout of new tools to bid on ads and the increase in business advertising online offerings to customers.

Alphabet remains committed to expanding revenue opportunities beyond simply advertising revenue despite the large increases in advertising revenue.

Estimated Next 12 Months

EV/EBITDA

Price-to-Sales

Price-to-Earnings

Facebook (FB)

11.9

6.8

21.1

Tencent Holdings (TCEHY)

18.7

6.0

25.3

Apple (AAPL)

20.5

6.3

25.9

Alphabet (GOOG)

15.6

6.6

26.8

Microsoft (MSFT)

22.8

11.5

33.0

Netflix (NFLX)

35.6

8.5

50.8

Amazon (AMZN)

19.2

3.2

52.7

Twitter (TWTR)

26.6

8.7

57.1

Snap (SNAP)

100.6

20.5

103.0