Alphabet Inc. – better known by its former name, Google Inc. (GOOGL) – is a technology conglomerate that oversees a number of businesses, including the world's largest internet search and advertising service, the popular streaming video website YouTube, the Android mobile operating system, cloud storage services and varied other growth ventures. Virtually synonymous with online search engines and the internet, it's even become a verb – to google something means to look it up on the web.
The California-based company processes billions of search requests each day, and it is among the most visible and recognizable private entities in the world. Although it has ventures in a wide array of internet-based fields, including email, social media, video, analytics, robotics and many other areas, internet search remains the primary driver of its sales and earnings.
Google is one of the most successful stocks of the 21st century, launching at just over $50 a share in August 2004 before reaching an all-time high of $1,004 in June 2017. Despite its non-dividend paying status, investors of all stripes have flocked to Google and helped transform it into a $660 billion company.
What are some things investors should know before deciding whether to go for Google?
Google split its stock in April 2014, creating A and C shares. The split doubled Google’s number of shares and cut the price in half. But the important difference is holders of GOOGL, or the A share, get one vote per share, and C shareholders get no votes. B holders get 10 votes per share, meaning they hold most of Google’s voting power. Google’s A shares have frequently traded at a small premium to its C shares, showing the market does place some value on voting power (the price quoted above is for the A shares).
The bottom line is Google allows investors to buy large shares of its equity, but relinquishes little control. Investors interested in Google who want to vote at its stockholder meetings should aim for the A shares.
In 2015, Google established a holding company named Alphabet and changed its slogan from "Don't be evil" to "Do the right thing." This reorganization is just one of many changes coming down the pike for Google investors, and it remains to be seen how the tech giant will handle the transition.
Google's Formidable Moat
Stocks that are safe investments have moats – that is, an enduring competitive advantage. Examples of a moat are cable companies, given the massive costs of building new wiring infrastructure, or Coca-Cola, which has an iconic name among consumers. Google certainly has a moat in the internet.
This is particularly impressive given the rate of change and intense competition on the web, whose flat structure means anyone can build a competing service However, Google has been able to gain and maintain dominance by delivering better results tat faster speeds than its competitors. Further, it has been able to consolidate its market share with its Chrome browser and Android operating system, and it pays Apple to be the default search engine on Apple mobile devices.
Billions of Searches
Over 3.5 billion searches are made on Google every day. Each search generates a tiny bit of revenue for Google as the company sells ads against these results. Google has 75% of the internet search market and 85% of the mobile search market. Additionally, search on the internet continues to grow as it becomes a more integral part of peoples' daily lives on a global basis.
A massive profit driver for the company, this is the main ingredient in making Google a safe investment. Nearly 90% of Google's earnings and revenues come from search. These profits and revenues fund the projects Google hopes become future profit centers. It allows the company to take on massive risks that other companies could not even consider.
Additionally, search has given Google a massive war chest and borrowing capacity that allows it to buy out any competitor before it becomes a serious threat. The ubiquity of its search product also ensures it continually evolves its algorithm to deliver better results for users. The more people who use Google search, the more data is collected.
Due to these inherent advantages, Google is in a much better spot than its smaller competitors, and is able to withstand competition and stress from economic weakness. And it has a history of doing so.
Thriving in Tough Conditions
The Great Recession in 2007-2008 was a massive stress test that many companies failed. Like all stocks, Google was also badly damaged by the selling pressure, falling 65% from its high at the tail end of 2007 to early 2009. However, once the stock market recovered and the economy began to show signs of growth, the company recovered all its losses in just three years. More importantly, even while the economy weakened over this time period, Google maintained growth in revenues.
With Google's competitive advantage and cash reserves, it has a beta of 1.03, which is significantly less than its smaller competitors that have a beta of 1.6 on average. Additionally during the Great Recession, many of its competitors were unable to survive, with others falling to the brink of bankruptcy.
This is not to say that Google doesn't face challenges.
Governments like to regulate things, though sometimes it takes them a while to get started. This pattern is evident in today's Internet sector, especially for conglomerates such as Google, Amazon and Facebook.
The entire net neutrality debate in the United States appears to target Google's competitors specifically, such as Verizon and Sprint, all under the auspices of internet fairness. But Google could be next. Having installed more than 100,000 miles of Internet service provider (ISP) fiber worldwide, the firm is a major contributor to the internet infrastructure.
Net neutrality is a slippery slope. The Federal Communications Commission (FCC) regulates radio and TV content, essentially limiting the services that communications companies can provide for their customers and their shareholders. Federal regulation over internet speed is the first stage in regulating Google content, search engine results and advertising. Google could find itself fighting the U.S. government for control over its own business.
This is already evident on an international scale. In 2015-16, the European Union brought charges against Google for manipulating search results to promote its own shopping sites. Facing billions in fines, Google could join the likes of Microsoft and Intel among companies successfully targeted by the EU. Similar charges were levied by the Competition Commission of India in 2015, which accused Google of "abusing its dominant position to rig search outcomes." The fine system in India is revenue-specific; Google faces a fine of up to 10% of all income, which is equal to billions of dollars.
If a company grows large enough, it runs into problems of scale. Larger companies have to deal with enormous infrastructure, compliance requirements, staffing headaches and relative inflexibility compared to their competitors. Google may find itself unable to generate more and more revenue through traditional means consistently, which translates into dwindling multiples for investors.
In a June 2015 letter to shareholders, co-founder Sergey Brin highlighted so-called "moonshots" that Google was taking. These include major capital investments in driverless cars, Google Glass, biotechnology and artificial intelligence. Most of these projects fall under the operating jurisdiction of Google X, a high-tech laboratory focused on futuristic experiments.
Brin and CEO Larry Page had previously warned Google shareholders that the company wanted to be unconventional. Short-term earnings wouldn't always be the focus, they said, because the potential for future innovation was just too exciting. It's a great sentiment for consumers, but it raises alarms for investors.
Shareholders may see returns stagnate if Google focuses on unproven, lower-returning ventures and less on generating efficient revenue. There's a possibility that Google could strike it big with a groundbreaking product or two, but there's always the chance that it won't.
So far, Google's more down-to-Earth attempts at diversification have yielded modest results at best. Google+ was supposed to be an exciting answer to Facebook and LinkedIn; instead, Google+ has hundreds of millions of members and very little activity. Google Glass has not performed any better.
Mobile Apps Replacing Search Engines
In terms of mobile access, Google lags behind its competitors. Apple generates a ton of revenue through mobile apps, which is the right space to be in when consumers are increasingly on mobile devices.
Traditional search engines – i.e., the old web browser – generate the bulk of ad revenue for Google. Every time a mobile user clicks on an app rather than using a search engine, Google's advertisers lose potential access. Smartphones don't have to go through Google.com to shop, travel or find restaurants. Google used to be the gatekeeper, but now there's a big new door for mobile users to travel through.
Google can compete in the mobile access arena, but it doesn't have the same overwhelming advantage against Apple and Facebook that it enjoyed over Yahoo or Bing. Google shareholders will eventually feel this squeeze unless the company can bring in other kinds of income.
Broader Market Risks
Every stock faces certain kinds of risk, albeit in different ways. In the short term, Google faces serious headline risks over anti-trust lawsuits, regulatory challenges and the continued failure of its Motorola acquisition. Shareholders begin to get cold feet when they read too many negative news stories for too long.
In the long term, Google faces the same broader risks as all technology companies. The NASDAQ has plummeted before, and there's no law that tech bubbles can't form – and burst. Stocks in the U.S. experienced remarkable growth between 2010 and 2015, but it's not entirely clear that the fundamentals back up that growth. Even a small pop could cost Google investors hundreds of dollars per share.
Capital markets are flush with cash on the back of the Federal Reserve's years-long low interest rate policy. Startup companies are receiving enormous valuations; Xiaomi, a Chinese smartphone maker with very little performance history, received a $46 billion launch in late 2014, for example. If interest rates go up and investors spook, the technology sector may prove to be soft.
The Bottom Line
Rosy as its performance has been, Google has had its share of missteps and strange investments since going public. The company faces serious challenges moving forward, most of which center around its size and industry dominance. Among these challenges are a need to diversify revenue sources and avoid costly regulations from domestic and international governments. Nevertheless, the stock remains a safe investment due to the dominance of its search business and massive cash holdings.