Does Alphabet deserve a place in your portfolio?

Alphabet – Google is working on everything from A to Z

In October of 2015 Google reorganized itself into Alphabet. Alphabet is a collection of businesses — the largest of which, of course, is Google. It also includes businesses that are generally pretty far afield (From healthcare to autonomous cars to generating power through renewable resources to providing internet) of its main Internet products such as Access, Calico, CapitalG, GV, Nest, Verily, Waymo, and X. All non-Google businesses collectively as reported under Other Bets. The Alphabet structure is about helping each of the businesses prosper through strong leaders and independence.

Google generates the majority of its revenue through advertising. Below is the breakdown of revenue generating segments:

1. Advertisements on Google properties & Google Network members properties
2. Google other revenue includes – Google Cloud, Play store, App & in-app purchases & hardware
3. Google moonshot project

For Q1 2018 Google generated $26.6 Billion, $4.3 Billion and $150 Million respectively, in revenue for the above mentioned segments.

Advertising business – Google’s Competitive Advantage

The world of online advertising is a duopoly with Google and Facebook owning over 90% of the market share worldwide. Google’s core products and platforms such as Android, Chrome, Gmail, Google Maps, Google Play, Search, and YouTube each have over one billion monthly active users.

The core of Google’s strength lies in its search capabilities. There is no other company that comes even close to challenging Google. When we search on Google we are not actually searching the internet but are searching Google’s index. Google spiders search the internet and organize all web pages in an index. Refer to this link to see how Google search works.

When making an investing decision its important to understand the competitive advantage that the company you are considering has. In my opinion Google has enormous competitive advantage and it is only growing.

Regulation Concerns – Will new regulations impact profitability?

Given the recent events at Facebook and the implementation of GDPR regulations in Europe investors are concerned about Google’s ability to continue to grow. I am of the camp that believes reasonable regulations are good for business and in case of Google they will contribute positively to its competitive advantage. Couple of days ago Wall Street Journal published an article on how these new regulations will benefit Google & Facebook. Some of the reasons that are highlighted in the article are:

1. Regulations are complex and smaller players don’t have the wherewithal to comply
2. Google & Facebook has an army of lawyers and engineers working on it
3. Many smaller players have decided to withdraw from EU because of these regulations

MoonShot Project

Google has been actively investing in unconventional projects. Some of these bets are to be considered while evaluating Google as an investment opportunity:

Waymo – Google’s autonomous car division

Google started working on autonomous cars in 2009. In 2017, Waymo started testing fully autonomous cars in the streets of Arizona. Watch the cars in action here. Since the early days of 2009 Waymo has test driven 5 million miles with the latest 1 million miles driven in just 3 months. This tells us that Google is very close to commercializing the product. It recently signed a deal with Jaquar to build 20,000 I-Pace fully autonomous electric cars.

Verily – Organizing world’s health data

Verily is developing tools to collect and organize health data, then creating interventions and platforms that put insights derived from that health data to use for more holistic care management. We have three guiding product design principles: start with the user, simplify care, and lead on security and privacy. Verily in partnership with Sanofi is offering OnDuo – a diabetic management platform for patients with type 2 diabetes.

Venture Capital

Through Google Ventures and CapitalG investment arms Google has invested in over 300 companies. Its includes investments in companies like Uber, Airbnb, Credit Karma, Survey Monkey etc.

Conclusion

I view Google as a start-up which generates a ton of cash. It’s mature yet growing advertising business generates a lot of cash without requiring significant capital investments and this provides it with an opportunity to invest in unconventional businesses like Waymo & Verily. In my opinion Google scores well on all the investing parameters that Charlie Munger often talks about:

1. Sustainable competitive advantage
2. Management should be good – Google is led by some of the brightest minds in the world
3. Price should be right – At current valuations it looks attractive. Read how to value a company

Disclaimer: These are my personal views and are for educational purposes only. I am long Google. Please do your own research before making any investment decisions.