In this SWOT analysis of Alphabet I take a broad look at the company. It is clearly a very large company with many different businesses. It will be interesting to sustainability investors for a few of its segments.
First, it owns NEST for climate control of smart homes that are getting smarter. The company is also a leader in converting to using alternative energy. It would not be unlikely they could enter the alternative energy space, possibly as a holding company for utilities or building out alternative energy capabilities. It is also a leader in AI which will impact everything from automation to the smart grid and beyond.
We will dive into Alphabets various segments over time, however, for now, let's start with a 30,000 foot view of the company with this SWOT report:
Alphabet operates the popular Google brand of internet search and related products such as: Google Maps, Ad Words, Chrome browser, Android, Google Cloud, Commerce, YouTube, Google Play, and hardware such as the Pixel smartphone. Alphabet also runs other businesses such as: Nest (smart home products), Waymo (autonomous vehicles), Access (fiber internet/TV/phone), Calico (drug development), CapitalG (equity investment fund), GV (Google Ventures), Verily (healthcare/disease prevention), and X (R&D lab for various projects).
Alphabet derives about from advertising. This revenue has been growing at a strong double-digit pace, which is driving double-digit earnings growth. Consensus estimates show that double-digit earnings growth is expected continue over the next five years.
- Alphabet is a leader in online advertising, deriving 87% of their revenue as the de facto king of online advertising. This revenue has been growing at a strong double-digit pace, which is driving double-digit earnings growth and is expected to do so for at least five more years.
- The company has 92.2% market share for internet search, including via video content through YouTube, moble OS, and internet search engines.
- Google search technology is contracted out to major online services and communications companies giving it a massive moat that none are close to challenging short-term.
- The domination in search engine market share makes Google a key site for attracting and retaining advertisers.
- Alphabet’s Android is in a duopoly for mobile operating systems in North America with Apple (AAPL). Android has roughly half of market share:
- YouTube is a popular video viewing site with one billion hours viewed daily. That equates to 115,000 years of videos viewed daily. That large amount of viewership attracts advertisers to the site.
- YouTube has entered the pay space which is directed at "cord cutters" and is now generating subscription revenue.
- Google and YouTube have a strong ability to attract user traffic, which attracts and retains advertising revenue. The company capitalizes on this strength through their effective algorithms that target ads to users.
- The company has a strong brand awareness which attracts new business. The word Google is now commonly used as a verb when people say “google that phrase”. This household brand recognition demonstrates the company’s leadership in the internet search space. Google that.
- The company's database of information is overwhelming and would cost tens or hundreds of billions to replicate.
- Alphabet is focused on innovation through R&D spending.
- The company’s financials are strong: above average revenue/earnings growth, strong balance sheet (low debt as compared to cash & a high current ratio). The company currently has over $106 billion in cash and short-term investments. The company's long-term debt is $4 billion.
- The company clearly exhibits monopoly characteristics which is good for shareholders.
- They have used their lead to grow their lead through acquisitions, over 100 the past several years. They acquired 8 companies in 2018 and 15 in 2017.
- The company is subject to falling ad rates, which can lower advertising revenue.
- The company is highly dependent on ad revenues.
- The company failed to gain a significant presence in social networking (Google Plus). Google Plus has 395 million monthly active users as compared to Facebook’s (FB) 2.2 billion MAUs.
- The company is highly dependent on advertising revenue.
- Alphabet lags in sales in the smartphone market (Pixel).
- The company's other ventures have not yet provided significant revenues and earnings to the bottom line.
- The Android operating system has a massive opportunity to help the company capture more market share.
- Android for computers could lead Alphabet to be a stronger direct competitor to Microsoft (MSFT) in computer operating systems. Their foothold with school systems could be a launching pad.
- The Pixel, built on a lean, strong, non-bloated, version of Android is a good machine and could lead to more direct competition with Samsung (OTC:SSNGY) potentially creating an Apple-lite like opportunity for Alphabet. Do not discount that Alphabet gets heavier into hardware and potentially spins out such a company.
- Alphabet has the opportunity to expand the Google Cloud business in the enterprise market over the next 3 to 5 years. There is an opportunity to capture market share as other firms, such as Amazon (AMZN), but also as the cloud grows to accommodate IoT, edge computing and the "smart everything" world.
- Alphabet has a strong track record with M&A. This can be another source of add-on growth for the company every year.
- They have access to create more streams of revenue through subscription services for entertainment, security, smart home, smart car, etc...
- The company can find new growth by capitalizing on new trends. This is where their innovative arm can grow into trends like virtual reality, AI, VR, AR, machine learning, 5G and quantum computing etc.
- The company, though secretive, is supposed to have a significant quantum computing program. Quantum computing will drive the next massive leg in Artificial Intelligence and edge computing.
- Ultimately, we should expect at least several "baby Googles" in the next decade. Their restructuring was specifically designed for that purpose. Access, Calico, CapitalG, GV, Nest, Verily, Waymo, and X are among the companies that could be spun out or used as merger candidates with other companies.
- Google is uniquely positioned to take part in the "smart everything" world.
- Alphabet faces significant competition, despite much of that competition being far behind at the moment. From their financial report - "we face competition from:
- General purpose search engines and information services, such as Baidu, Microsoft's Bing, Naver, Seznam, Verizon's Yahoo, and Yandex.
- Vertical search engines and e-commerce websites, such as Amazon and eBay (e-commerce), Kayak (travel queries), LinkedIn (job queries), and WebMD (health queries).
- Social networks, such as Facebook, Snap, and Twitter. Some users increasingly rely on social networks for product or service referrals, rather than seeking information through traditional search engines.
- Providers of digital video services, such as Amazon, Facebook, Hulu, and Netflix.
- Providers of enterprise cloud services, including Alibaba, Amazon and Microsoft.
- Digital assistant providers, such as Amazon, Apple, and Microsoft.”
- The company may need to increase R&D spending to remain competitive.
- Alphabet faces legal issues on a global basis. For example, some regions such as the EU who fined the company $5.1 billion in an antitrust issue regarding the Android operating system. The company also lost a lawsuit regarding a copyright case from Oracle. Future lawsuits could arise regarding the company’s search results or how they conduct business.
- Since Alphabet operates globally, they are subject to currency fluctuations.
- Potentially the biggest threat is not business related, but rather governments seeking to punish Google's success. While the company's monopoly power in search is sizable, it is not inconceivable that AI from other companies will create a better mousetrap soon. Politicians seeking to grandstand, limit Google or force divestitures could clearly overstep (we've never seen pols do that before).
Alphabet is an extremely well positioned company for the "smart everything" world that is developing. Financially it is a powerhouse with limited risk in any financial metric.
They are highly likely to remain a leader in advertising due to their established presence, ability to grow existing businesses and through M&A. This is the cash pile from which they will build new companies.
The Baby Googles are coming. You will want part of those. Think of AT&T (T) decades ago and the wealth created (and ultimately destroyed, so we'll have a sell strategy) by those Baby Bells and other companies.
The company is very likely to engage in very significant mergers and acquisitions activity. Not only to gain presence in emerging "smart everything" markets, but also to thwart torturous interference from the government.
Spin-offs and mergers will not be small. Most will be borderline S&P 500 or S&P 500 sized companies from the get go. That will create significant investment opportunities as those companies get added to the SP 500 index's passive investment machine - regular new investment from investors.
As of early 2019, Alphabet has a low valuation for such a financially strong company that is dominating a large market and has entry into other markets that will be huge in the future. It is currently rated a buy and one of our core long-term stocks.