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It doesn’t take a lot to make a business truly successful in the long run. However, it can be difficult for a company to have all of them. And I think the parents of Google and YouTube Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is poised for continued success. Alphabet shares are well below the $100 mark, after losing 28% of their value over the past year. Lately I have been buying it for my portfolio.
So why do I feel that Alphabet has what it takes to be a great business not just now but for the long term?
Large target market
The market for the types of services that Alphabet offers is already huge, and I hope it stays that way. In my opinion, the demand for things like cloud hosting and email delivery will continue for decades.
What about the search, the jewel in the crown? I see some risk here: AI services can provide information that people need without them having to search for it. That could potentially reduce the massive ad sales that fuel Alphabet’s profits.
But I see it differently. Google’s mission has long been to organize the world’s information. So far, search is the way you’ve done it most obviously. But I think you can use AI or other innovations to tailor your delivery model to the moment. In the long run, I expect Google to remain a market leader in the real business of search: connecting users to information.
Competitive advantage
Other companies compete in similar areas. They are also impressive opponents, such as Microsoft and Amazon. So what sets Alphabet apart?
I think the pie is big enough that it can be divided among multiple players and still be lucrative for each one. I think Amazon, Alphabet and Microsoft could make big profits in the future with cloud computing, for example.
But I also think that Alphabet has strong competitive advantages. Its brands, its huge user bases, its technical prowess and its library of patents set it apart. They also help build user loyalty.
Monetization and cash flows
One thing that puts me off many tech stocks is the lack of earnings.
To be a good business in the long run, a company needs to make a profit and also have cash. Book profits are good, but free cash flow is the oil that lubricates the business engine.
The company’s most recent quarter was widely viewed as disappointing by investors, who have downgraded Alphabet shares accordingly. But the business reported net income of $13.6 billion and free cash flow of $16 billion. Those are huge numbers for a single quarter. In my opinion, they underscore how attractive Alphabet’s business model is.
I’m buying the shares
But a great deal is not always a rewarding investment. After all, if you had bought the company a year ago, you would now have a significant paper loss.
What about today’s valuation?
The market capitalization of $1.2 trillion sounds huge. But with net income last year of $60 billion, the price-earnings ratio is only around 20.
In the long term, I think Alphabet’s strong business features could help it grow revenue, perhaps substantially. So I think that Alphabet’s current stock price is a great buying opportunity for my portfolio. I’ve been taking advantage of it!
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