WEEKLY COMPANY INSIGHT: ALPHABET
Roy Davidson, 20 June 2019
Alphabet (GOOGL) is a global technology company focused on web search and advertising. The company generates revenue primarily by delivering search and display advertising on desktop and mobile platforms.
Alphabet is created in an effort to keep innovation alive
Alphabet replaced Google as the publicly-traded entity, and Google has become a wholly owned subsidiary of Alphabet that 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 Waymo, Verily, 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 as President. GOOGL’s Senior Vice President of Products, Sundar Pichai, became CEO of Google.
Impressive performance from 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 viewership on TV sets over the last twelve months has nearly doubled. 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.
New revenue streams remain important for future growth outlook
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, more attention will likely be paid to this segment over the next 12 months. Based on the level of investment that GOOGL has put into these businesses through 2018, we believe it could represent a source of upside to market estimates through 2019. In addition, given the eventual deceleration in growth from GOOGL’s ad revenue, these two initiatives are also more strategically important to the outlook of the company than most investors likely appreciate.
GOOGL is one of the only internet companies that has 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, we believe that GOOGL’s undemanding valuation and significant long-term growth opportunities (cloud infrastructure, virtual reality, autonomous driving and machine learning) make it an attractive investment option.
- economic downturn
- failed product launches
- increased competition