Pros and Cons to Buying Alphabet Stock
There are only a handful of companies in the world that can argue they have power approaching Alphabet Inc (ticker: GOOG, GOOGL). And ever since its initial public offering in 2004, GOOG stock has performed accordingly.
Fifteen years after its IPO, the world's leading search engine isn't the growth dynamo once was, but adjusted for its size, revenue growth remains enviable. That said, its rivals are getting stronger, and for the first time it's an open question in Silicon Valley whether Google might eventually lose its search mojo as popular consumer tech products evolve.
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Here's a brief overview of the Mountain View, California-based technology giant, its core areas of business, and -- most importantly for prospective investors -- the pros and cons to buying GOOG stock.
Alphabet Stock at a Glance
In 2015, Google restructured its business and reincorporated itself as Alphabet, a holding company whose major subsidiary would be Google, the world's dominant search company. Under the restructuring, investors were able to differentiate the results between the cash-cow Google and its money-losing "moonshot" investments in the "Other Bets" category.
Despite the separation, there's a reason the company kept its ticker as GOOG; Alphabet is still essentially just a big proxy for its crown jewel, Google.
The search giant controls more than 60% of the U.S. market, and likely over 80% or more of the global market share.
GOOG stock's lifeblood is digital advertising, a massive and growing industry that, along with Facebook ( FB), it dominates. Google sells ads against its search results for specific terms, and also operates a sprawling ad network, placing ads on third-party sites for a cut of the resulting revenue.
With mobile overtaking desktop as the world's preferred search device, Google's Android operating system becomes ever more valuable; Android enjoys somewhere between 70% and 80% of global market share and Google is the default search engine for Android.
YouTube, Gmail, Google Play, Pixel phones, Google Home smart speakers, Google Cloud and the company's expanding hardware business are a few of the big-name products and services aside from the search engine.
As for Other Bets, it accounted for an immaterial 0.4% of Alphabet's overall revenue last quarter, and loses a disproportionate amount of money doing so. In the second quarter of 2019, Google posted $10.4 billion in operating income while Other Bets posted an operating loss of $1 billion. This is where some of the wacky yet potentially huge long term projects live, such as Google Fiber, the Waymo self-driving car unit, anti-aging research outfit Verily, a network of internet-beaming balloons and a drone delivery unit.
Pros to Buying GOOG Stock
The first and most obvious advantage to owning Alphabet stock, is simply owning a piece of the biggest, baddest search engine in the world.
Total paid clicks in the second quarter of 2019 rose 28% year-over-year. And for the time being Android serves as a pretty good insurance policy against other search companies meaningfully cannibalizing mobile share.
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The second "pro" to owning GOOG stock, aside from its big-time search engine cash cow and exceptional brand, is the company's investment in diversification: self-driving cars, YouTube, artificial intelligence, cloud and voice search.
YouTube is arguably at the epicenter of the consumer transition from traditional mass-market media to dispersed, on-demand and increasingly mobile media consumption.
At this point, advertisers who aren't shifting more and more of their budget to online video platforms are simply missing out.
Longer term, Google's willingness to invest in bold new projects outside its core competency as a search engine could be precisely what allows it to continue as a growth stock despite hundreds of billions in annual revenue.
Several promising areas hold the type of game-changing potential that could launch a new era of growth for GOOG shareholders: In particular, AI and autonomous vehicles (AVs). Alphabet's Waymo subsidiary is already a leader in AVs, and Alphabet's R&D investments in artificial intelligence have made it one of the best AI companies too.
A line item dubbed "Google other revenues," which includes both Google Cloud and its Pixel mobile phones, enjoyed revenue growth of 40% in the second quarter to $6.2 billion -- not bad for a couple side businesses.
The final "pro" when it comes to buying Google stock is an open secret: chief financial officer Ruth Porat. Widely respected on Wall Street and poached from Morgan Stanley ( MS) in 2015, she oversaw the reorganization of Google into the holding company Alphabet, allowing the company to show just how profitable the core search business was -- and how investing in potential "moonshots" affects overall earnings. Porat's presence gives investors the sense that there's an adult in the room making sure spending doesn't get too out of hand.
Cons to Buying GOOG Stock
Interestingly enough, one of the biggest cons to buying Alphabet shares is the fact that Amazon.com ( AMZN) exists. Not only that it exists, but that it's attacking the search giant on all fronts.
Perhaps the greatest long-term risk Amazon poses to GOOG is its encroachment into voice search -- perhaps the future of search itself -- where Amazon's Alexa virtual assistant has a huge first-mover advantage that it's ruthlessly capitalized on.
Amazon is also seizing digital advertising dollars, as marketers shift spending to Amazon.com's growing platform and more and more lucrative product searches begin on Amazon than Google. In cloud, Amazon Web Services is the clear market leader, with Google Cloud playing catch-up and occupying a distant third place behind Amazon and Microsoft ( MSFT) Azure. Jeff Bezos's ruthlessly opportunistic company is also devoting time, energy and resources to AI.
Taken in concert, these trends don't look particularly good for Alphabet or inspire much confidence in its ability to churn out company-changing profits in something other than search. Amazon beat Google to market by years in smart speakers and cloud computing, GOOG's Pixel phone has thus far proven a clumsy attempt to mimic Apple's ( AAPL) longtime strategy of elegantly marrying software and hardware, and the company even tried to copy Facebook with its ill-fated and largely ignored Google+ social network, which was finally discontinued after seven ho-hum years.
Another thing to worry about is the specter of regulation, which is suddenly less of a specter and more an inevitability.
The European Commission fined Google a record $5 billion in 2018 for using Android's dominance to stifle competition. And while the U.S. may be slow to the draw with regulation, in mid-2019 news broke that the Department of Justice had opened an antitrust inquiry into the company.
Lastly, GOOG stock certainly doesn't appear grossly overvalued for instance, but shares do trade for 25 times earnings with no obvious catalyst on the horizon other than the potential negative impact of regulation. With slowing global growth and a flat yield curve indicating trouble ahead, the timing doesn't seem ideal for potential Alphabet shareholders, either.
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The Bottom Line for GOOG Stock
No stock is perfect, and Alphabet is no different. But the company does have an incredible competitive advantage in search, and works hard to innovate and stay on top of its cash cow, while diversifying its business and researching areas for future dynamic growth.
There's no other company in the world positioned the way the Alphabet is, and that's the most compelling fundamental reason to buy. Yes, Google is entering a new era where regulation could be a major overhang, but keep in mind Big Tech counterparts like Apple, Facebook and Amazon are also under the microscope.
If you're holding for the long term though, and want to own one of the most compelling companies in tech, there's nothing wrong with buying some GOOG now simply for peace of mind, and adding more if and when it pulls back.
