3 Reasons Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) Stock Belongs In Your Portfolio

- April 20, 2017

Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) is the global giant of the internet.  Alphabet Inc’s main businesses are Google search (includes adwords), YouTube, Google Apps, Google maps, Google cloud and android.  Other businesses include Calico, and Google Fiber, as well as its investing arms such as GV (Google Ventures) and Google Capital, and incubator projects such as X (Google X).  Almost all of Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) revenue comes from ad spending.

3 reasons GOOG stock belongs in your portfolio

1)   Internet penetration will continue to grow rapidly as the global middle class rises.

Currently there are around 3.6b internet users globally, out of 7.4b people on the planet.  That represents around 49% of the planet being online. Or viewed another way 51%, or more than half, are not yet connected.  Excluding the very young and the very old (say 1b); there is a market to add almost 3b internet users globally, even before allowing for population growth.

Internet penetration rate is only 35.3% in developing counties, and only 9.5% in the least developed countries ((LDCs)).  It is clear that as internet users grow, so will the number of users that use Google.  Internet users grew by 7.5% in 2016.

              Global internet user’s graph

Source

2)      Google is global number one in all their main businesses

All of Google’s main businesses are global leaders:

  • Google.com is the world’s most visited website. In US search, Google is forecasted to capture a staggering 78% market share, easily beating out rivals Yahoo (YHOO) and Bing.
  • YouTube is the world’s most popular video site, and second most visited website globally, with 1 billion hours watched each day.
  • Google Chrome is the world’s most popular internet browser.
  • Gmail is the world’s most popular email service with more than 1 billion active users.
  • Android is the world’s most popular smartphone and tablet operating system, with 63% market share.
  • Google maps is the world’s most popular map navigation system.

In 2017,  eMarketer forecasts Google will achieve 40.7% of the US digital advertising spending, compared to Facebook (FB) at 19.7%. The other competitors are too small to mention.  

Google’s total digital ad revenue growth in the US is forecast to average 11% CAGR from 2015-2020.  Google is forecast to capture US$60.92 billion in search ad revenue in 2017, or 58.8 per cent of the search ad market worldwide, and a big chunk of its overall ad revenue.

Source: Hade Platform

Google is so entrenched that the company name is now a commonly used word.  Everyday people say just “Google’ it.  Google has the internet traffic, making it the most popular site to advertise on  and Google Adwords is very effective at monetizing this opportunity.

3)   Strong financials – A fair valuation and a strong growth outlook.

Alphabet Inc has a market cap of USD 584b, and a 2017 PE (estimate) of 20.4.  Revenue and net income are both forecast to grow strongly through 2019.  Net profit margin in 2016 was a healthy 21.58%, forecast to slightly improve going forward.  Analyst consensus estimates are for a 1 year price target of US$978, representing significant upside.

Alphabet Inc. financials chart

Source: Hade Platform

Conclusion

Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) or Google is the titanic of the internet with no less than 6 global number one businesses.  Google search is likely to be the global leader for decades to come as is YouTube.  Given how global internet penetration is growing at 7.5% annually, Google is likely to grow strongly across all their internet businesses for many years to come. Investors can buy into the world’s number one internet company at reasonable valuations, and solid growth prospects.  Or as Charlie Munger once said about Google, “I have probably never seen such a wide moat”.  This makes GOOG stock a must have in any long term investment portfolio.

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