Alphabet (Google) Investment Thesis

http://www.edgemoorinv.com/wp-content/uploads/2018/01/4Q-2017-Newsletter.pdf

Alphabet, Inc. (GOOG)

 Alphabet, Inc., the parent of Google, is a global technology company best known for its dominant internet search engine, which currently controls 80% of global online searches. The company’s revenue growth has averaged nearly 18% annually for the last three years and topped 24% year-over-year in the third quarter of 2017. This growth has been driven by substantial increases in both desktop and mobile advertising revenue, which together account for 87% of total company revenues.
In addition to search, the company’s array of internet services includes Gmail, YouTube, Google Maps, Google Earth, and Google Play, as well as the Chrome internet browser and the mobile Android operating system, which powers an estimated 75% of smartphones around the world. We believe these core assets provide a cohesive, end-to-end experience for consumers and, most importantly, drive internet advertisers to Google sites.
As the online advertising market has matured, advertisers have increasingly consolidated their spending around companies like Google with broad platforms, a vast user base, and unique assets. Consumers use Google products almost habitually (an estimated 90% of all mobile searches are performed on the Google platform), creating a switching cost based on familiarity and not just technology, which we believe will continue to protect the company’s online dominance and fuel growth.
Alphabet also invests heavily in emerging technologies, including enterprise cloud services, artificial intelligence, and autonomous vehicles. These investments leverage the company’s technological expertise and have the potential to drive growth for decades to come.
Alphabet’s financial position is currently as strong as its market presence. The company should generate a record $107 billion of revenues in 2017, an increase of 19% over 2016. Alphabet also generates approximately $25 billion of free cash flow annually and held $100 billion of cash and marketable securities at September 30, 2017. We believe the balance sheet is solid, with just $4 billion of long-term debt and over $150 billion of total shareholder equity.
At 24 times estimated 2018 earnings, Alphabet stock trades at a premium to the S&P 500 average of 19 times, but it trades closer to that average when adjusted for the company’s large cash position. Furthermore, we believe the company’s higher than average growth prospects and strong competitive advantages justify a premium and make Alphabet stock an attractive long-term investment.