WEEKLY STOCK COMMENT: GOOGLE
Roy Davidson, 8 November 2018
Google (GOOGL) is a global technology company focussed on web search and advertising. The company generates revenue primarily by delivering search and display advertising on desktop and mobile platforms.
Alphabet has replaced Google as the publicly-traded entity, and Google has become a wholly-owned subsidiary of Alphabet and includes all of the company’s core internet businesses. The second segment, named Other Bets, holds all of the company’s start-ups or ‘moonshot ideas’ (such as Nest, Fiber, Calico and Google X). GOOGL’s co-founders Larry Page and Sergey Brin look to be focusing more of their time on the company’s more left of field ideas with Larry becoming CEO of Alphabet and Sergey President. GOOGL’s Senior Vice President of Products, Sundar Pichai, has become CEO of Google.
Google Websites, which includes GOOGL’s most ubiquitous services such as Search, YouTube and Maps, has continued to surpass expectations on the back of surging ad volumes. We believe that mobile search will remain a big tailwind for GOOGL over the medium-term, given it still only accounts for around 55% of all search queries. YouTube now has 1.5 billion monthly viewers and the amount of time spent watching TV over the last twelve months has nearly doubled. More importantly, advertiser feedback has been extremely positive and some advertisers have seen an increase in interest from their clients. GOOGL provides very limited disclosure on the revenue generated from its various online services. In our view, additional disclosure could unlock significant value for GOOGL shares and we believe it’s increasingly likely to occur over the near-term now that these businesses are much more mature.
In our view, GOOGL’s Other revenue segment continues to be overlooked by most investors. With the launch of three new hardware devices (Pixel, Google Home and Daydream), as well as the continued strong growth of GOOGL’s cloud business (Cloud Compute Platform), more attention will likely be paid to this segment through 2018. Also, the strong outperformance of these businesses during 2017 could represent a source of upside to market estimates if this momentum flows through into 2018. Given the eventual deceleration in growth from GOOGL’s ad revenue, these two initiatives are also more strategically important to the future outlook of the company than most investors likely appreciate.
GOOGL is one of the only internet companies that have been able to continuously position itself for major secular moves in the internet market. GOOGL has built up a competitive position in the most important digital consumer markets including mobile and digital infrastructure (Android, Chrome, Play Store), digital services (Maps, Gmail, Docs, Drive, YouTube), and monetisation (AdWords and AdSense). While heavy investment spending and growing regulatory risks are likely to weigh on sentiment over the near-term, GOOGL’s undemanding valuation and significant long-term growth opportunities (cloud infrastructure, virtual reality and machine learning) make it an attractive investment option.
Potential risks to GOOGL include:
- economic downturn
- failed product launches
- increased competition