Summary
Alphabet is a high-quality business with rock-solid competitive advantages.
The company is delivering vigorous growth at scale, combined with outstanding profitability.
Valuation is remarkably attractive considering the quality of the business and its financial performance.
Regulatory pressure and data privacy issues are the main risk factors to watch.
A simple investment thesis can be particularly effective: quality, growth, and valuation are 3 key reasons to consider owning Alphabet stock for the long term.
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JHVEPhoto/iStock Editorial via Getty Images Leonardo da Vinci famously said that simplicity is the ultimate sophistication. A similar concept was proposed by Peter Lynch regarding investment research “Never invest in an idea that you can’t illustrate with a crayon”.
Alphabet ( GOOG ) ( GOOGL ), is a high-quality business with unique competitive advantages, the company is delivering vigorous revenue growth with exceptional profitability, and the stock is very attractively valued at current prices. In very simple terms, fundamental quality, financial performance, and valuation are three basic reasons to own Alphabet stock. Fundamental Quality
Google is the leading player in search by a wide margin. The brand is so powerful that consumers use the expression “googling” information as opposed to online searching. Only the most valuable brands in the world can replace the name of the product or service with their own name.
Alphabet also benefits from scale advantages and the network effect. The more we use Alphabet’s ecosystem of services, the more the company learns from its data, and it leverages on Artificial Intelligence to get exponentially better over time.
Privacy concerns are obviously a key issue in this regard, but it is fair to say that for most consumers the benefits of Google’s offerings far outweigh those concerns. We always need to look at what consumers actually do over what they say, and the evidence shows that global consumers are deeply engaged with Alphabet and its wide ecosystem of services and applications.
The network effect provides an additional source of sustained competitive advantage for Alphabet. The more videos are uploaded to YouTube, the more viewers are attracted to the platform. More viewers also provide the incentive for content creators to keep producing more and better content. Creators and viewers attract each other to the leading platform that YouTube is, creating a self-sustaining virtuous cycle for the business.
It is not much of a stretch to say that Alphabet is one of the strongest companies in the world when it comes to competitive advantages, and these advantages can allow the company to continue creating value for investors over the long term. Financial Performance
Alphabet’s numbers for the fourth quarter of 2021 were nothing short of impressive. While rivals such as Meta ( FB ) are being hurt by changes in the Apple IDFA and competition from TikTok, Google keeps delivering outstanding performance at a large scale.
Total revenue during the fourth quarter of 2021 reached $75.3 billion, an increase of 32% year over year. Operating margin during the full year 2021 came in more than healthy, at 31% of revenue.
YouTube advertising revenue reached $8.63 billion, growing 25% versus the same quarter last year. The platform reached five trillion all-time views during the quarter, and it now has over fifteen billion views each day globally. In the past year, the number of YouTube channels that made at least $10,000 in revenue was up more than 40% year over year
Google is increasingly focusing on commerce for YouTube, making it easier for viewers to buy what they see on the platform and also for advertisers to drive action with new features such as product feeds in Video Action Campaigns and live commerce. The opportunities in this area are certainly compelling.
The cloud business is also firing on all cylinders. Cloud revenue grew 45% year-over-year to $5.5 billion last quarter. Alphabet’s backlog increased more than 70% to $51 billion, most of which is attributed to Google Cloud.The balance sheet is pristine, Alphabet ended the year with $140 billion in cash and marketable securities versus only $14.8 billion in long-term debt, for a net cash position of $125.2 billion.On the back of strong cash flow generation plus abundant balance sheet cash, Alphabet has more than enough resources to make all kinds of investments and acquisitions, and perhaps also to reward investors with increasing buybacks in the years ahead. Attractive Valuation All this comes for an attractive valuation, […]
source The Bullish Case For Alphabet: Quality, Growth, And Valuation
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