• Jonathan Jackson

A, B, C, easy as one, two, three.

Updated: May 1, 2020

Why we Like Alphabet…

Alphabet is the public holding company for Google, one of the world’s most widely-used brands. Just consider the following services owned by the company, all of which have over one billion monthly active users.

· Google is the global market leader in online search that has become a verb in its own right.

· YouTube is the go-to platform for digital video. It has more than 1.5bn monthly logged-in users who spend on average more than one hour per day watching content just on their mobile device.

· Chrome is now the world’s most popular web browser.

· Android is the operating system for two thirds of the world’s mobile phones.

· Gmail is arguably the best free email service provider.

· Google Maps is the most popular mapping service.

At present, the group generates the vast majority of its revenue from advertising. In a world where advertising is undergoing a secular shift away from traditional media, such as TV and newspapers, towards online media, Google is part of a formidable digital advertising duopoly. Over the last four years, the group’s sales have doubled to $111bn, and even from this large base, growth remains strong – in the latest quarter, revenue grew 23% on a constant currency basis, driven by growth in mobile search and video.

Margins remain high, even though the group is having to pay more to other companies to carry its search service and adverts and is spending more on data centres and network capacity. However, we believe this investment is increasing the group’s barriers to entry.

The company has a strong track record of innovation, leaving it well placed to capitalise on a wide variety of new technological themes. Think of an emerging trend, and Alphabet seems to have an exposure.

· In cloud computing, although Google Cloud is a distant number three in this large and fast-growing market, it is currently growing at 75% per annum.

· In driverless cars, Waymo has partnered with Fiat Chrysler and has a fleet of vehicles in Phoenix driving without a person behind the wheel. The company has now reached 8m miles of driving on city streets and 5bn miles of simulated driving, leaving it on track for a commercial launch this year.

· In healthcare, the group owns Verily (health data) and Calico (lifespan control).

· In machine learning and artificial intelligence, the group owns Google Assistant, Google Brain, and Deep Mind.

· In fast broadband, Google Fiber offers a fibre-to the-premises service.

· In smart systems, Nest offers products for the connected home.

Some of these innovations are already generating revenue, with hardware, cloud services, and digital content now accounting for 15% of group sales, while others remain part of the group’s Other Bets division, effectively an incubator fund for new products and technologies.

Alphabet is a financial monster. In the latest quarter alone, the company generated free cash flow of $4.7bn and currently has a cash pile of more than $100bn. Reassuringly, there is a strong focus on cost control and prudent capital allocation, with a $7bn share buyback currently in progress.

As with any company with such a strong market position, there are risks, in particular the threat of increased regulation and government interference. In July, for example, the group was handed a $5.1bn antitrust fine by the EU, while last spring the Facebook/Cambridge Analytica incident brought to the fore issues surrounding data privacy. We hope (and believe) the company (and the industry) will avoid worst-case outcomes by choosing to improve its business practices, use of data, and content on its platforms.

The shares currently trade on 21x 2019 earnings, below most of the other technology majors (or FAANGs), and at a level we believe is very attractive for a company exposed to a wide range of long-term secular growth trends.

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