“Google is not a conventional company. We do not intend to become one.”
Those were the words of founders Larry Page and Sergey Brin in their letter to investors at Google’s IPO.
An investment of $A10,000 in Google’s initial public offering in 2004 would be worth about $A265,000 today. In 2016 the Google company was restructured, with Alphabet as the listed holding company and Google one of its subsidiaries.
Google is best known as the dominant player in internet search.
However it also owns the world’s largest video content site, Youtube, the world’s largest webmail service, Gmail and the world’s most widely used mobile operating system, Android.
Other Alphabet divisions include Waymo, which leads the world in the development of technology for Autonomous vehicles, DeepMind, arguably the leader in artificial intelligence and Google Cloud one of the top five cloud service providers in the world.
Since listing revenue has increased by a factor of 28 to $US90 billion in 2016. 90% of revenue comes from advertising.
In the most recent quarter ended September 30, revenue was $US28 billion, up 24% on the same period last year.
Alphabet places a high priority on investing for the long term in research and development.
These bets like autonomous driving, artificial intelligence and life sciences are unlikely to generate significant revenue in the short term, but they are all areas with potentially huge addressable markets and could have transformative impacts on the company in the future.
Whilst Google would appear to be in a very strong position it is not without risk.
As Google itself disrupted the incumbents 20 years ago, there is always the possibility that someone will disrupt it.
A current threat is the trend toward voice search. If people are using spoken commands for speech, there is less opportunity to present them with screen based advertising. Also, a lot of advertising is moving towards social media where Facebook dominates.
Another big threat is political.
In June it was fined 2.42 billion Euro over abuse of dominance in search by the EU’s competition commissioner. This has emboldened other political opposition campaigning around the themes of privacy and competition.
Alphabet is a growth stock by most measures.
Profits have increased by more than 20%pa for the past 10 years.
The question is can a company with revenue of more than $US100 billion and a market capitalisation of about $US730 billion continue to grow strongly, or will the law of big numbers prove insurmountable?
Apple is the third largest company in the US by revenue with over $US200 billion suggesting that $US100 billion is not necessarily a ceiling.
A lot will hinge on some of the moon shot projects it is working on. Morgan Stanley has estimated that Waymo alone could be worth $US70 billion by 2030.
Alphabet is trading on a PE ratio of 32 but that reduces to 22 when measured against 2019 forecast earnings. Whilst the valuation is high, if the forecast growth trajectory can be maintained then it may well be justified. By way of comparison, Amazon has a PE ratio of 270, Facebook 30 and Netflix 151.
For today’s investor it is relatively easy to access US shares. In addition to the large brokers, there are a number of new firms that are offering low cost US share broking services.