ALPHABET (GOOGL) INVESTMENT THESIS
Everyone believes that there is something big on the way. Nobody knows what it is, but they believe, and there are thousands and thousands of people working together bringing creativity, ideas and technical acumen together in Silicon Valley. Google
is the company which best encapsulates this concept. That next big thing will be worth billions of dollars to the company gets it right.
INVESTMENT THESIS
The Investment Thesis for Google is founded on three pillars
1. ADVERTISING PLATFORM
Google search is an advertising platform which charges advertisers on a cost per click or a page views basis. For every ad clicked on or viewed, the Google cash register rings. The GoogleBots comb through search histories, establish user
profiles and are able to provide targeted advertising which increases the revenue Google is able to charge advertisers.
2. MONETIZATION OF ANCILLIARY BUSINESSES
YouTube provides a video advertising platform which generates
a higher revenue per advertising view than text search.
Nest system builds on the concept of the connected home
Waymo builds on the trend towards self driving vehicles.
Maps ties in location with local targeted advertising.
Chrome uses search history to target advertising.
Android operating system is the largest mobile OS.
Google Pixel is the mobile phone hardware which has the opportunity for global market share growth.
Each of these ancilliary
businesses ties into the Google ecosystem with the objective of data collection to provide targeted advertising and services.
3. MACROECONOMIC ENVIRONMENT
The macroeconomic environment is both Googles greatest strength
and also its greatest weakness. In a strong economy Google is able to command a higher revenue per ad based on demand. In a weak economy, advertisers will command lower prices. Good economy or bad, marketing strategies aim to be where
the consumers are and companies always have to advertise to generate sales revenue.
In 2010 Google withdrew from the Chinese market as it would not comply with censorship restrictions. If Google re-enters that market, the growth
will accelerate as it is one of the few big cap tech companies without penetration in that market.
Advertising is a sector which is not directly subject to tariffs, trade wars, oil prices, logistics, channel inventories or interest
rates.
What does that mean at MONEYWISEHQ?
The culture of creativity in Silicon Valley is hard to comprehend, even when emersed in it, but that creativity has revolutionized societal behaviour so dramatically within a
decade and will continue to drive profits in the future.
To a business analyst, costs would seem out of control, the product mix haphazard or not related to the core business and opportunities for profit wasted . There is a cost
to creativity.
Advertising is Google’s core business and the company has been diversifying with ancillary products and creating its own ecosystem to generate information flow towards that business.
There are high barriers
to entry in the advertising platform space and only the biggest players have the scale and scope to advance including Facebook, Amazon, and Twitter. Competition is growing and the company which can convert the highest click through conversions
will command the highest advertising revenue.
Google is the best in class advertising platform with a mature core business looking for that ‘next big thing’. Which of the Silicon Valley tech giants will find it?