ALPHABET is an American multinational technology conglomerate with a market value of $856 billion (R12.45 trillion).
It was created through the restructuring of Google in 2015. Google is a market leader in the search and online advertising markets, and is considered one of the big four technology companies alongside Amazon, Apple and Facebook.
The company acquired its name from the word “googol”, a mathematical term representing one followed by one hundred zeros.
It signifies the search engine’s capacity to offer access to the vast amount of information on the internet. Its web-based search engine averages 65 000 searches every second.
In one of corporate history’s greatest blunders, Yahoo refused to buy Google’s search engine technology for $1m in 1999. Three years later Yahoo offered to buy Google for $3 billion, but was unwilling to pay the $5bn Google wanted. Today Google is worth more than 160 times that amount.
Alphabet’s revenues are primarily generated from business advertising on Google’s own websites and from advertising space on third-party websites. Its business segments are Google and Other Bets.
The Google segment includes its internet products such as Search, Ads, Commerce, Maps, YouTube, Google Cloud, Android, Chrome and Google Play.
The Other Bets are early-stage, experimental businesses with enormous long-term potential. This includes autonomous driving and virtual reality.
Although this segment remains unprofitable, management has reiterated that Alphabet continues to invest meaningfully for the long-term opportunities they see.
Alphabet has acquired over 220 companies since 2001, which is roughly one acquisition per month.
The company’s most recent quarterly results beat expectations on virtually all metrics. Google’s advertising revenue increased 16 percent.
Given the company’s high dependence on advertising revenues, it is encouraging that its non-advertising revenue soared by 40 percent.
This was largely due to the strength of Google Cloud products and Google Play. Alphabet also announced a massive $25bn share repurchase plan.
Although this is only 3 percent of its own market capitalisation, it is equivalent to the market value of Capitec, Nedbank and Absa combined.
Potential channel conflicts between search results and the company’s own services could diminish Alphabet’s dominance in the internet space.
Although the new antitrust probe opened by the US department of Justice raises some concern, it isn’t new to Alphabet.
They operate under strict regulation, be it on privacy, competition, copyright or intellectual property and they have encountered many similar cases before.
Data leakage or political force to supply user data could possibly also result in diminishing user trust and search traffic erosion.
However, Alphabet’s undisputed leadership in the search engine space, high innovation rate, diversification into non-advertising business models and strong financial position bode well for its long-term growth.
Its strong brand name and superior search algorithms enable Alphabet to attract high user traffic and generate switching costs due to users’ familiarity with the engine.
They are poised to benefit from growth in wearable information technology and Internet of Things by leveraging their huge user base.
At an undemanding forward priceto-earnings multiple of 18 Alphabet is a sensible addition to investment portfolios. Frants Preis, CFA, is a portfolio manager at Vega Asset Management based in Pretoria. Alphabet shares are owned on behalf of clients.