This is, without a doubt, one of the best businesses the world has ever seen.
Alphabet (GOOGL 1.03%) (GOOG 0.96%) shares have climbed 6,290% since they had their initial public offering 20 years ago in August 2004. During that same time period, the S&P 500 generated a total return of 637%.
Nowadays, Alphabet is one of the world’s most dominant businesses, carrying a market cap of $2 trillion and raking in $328 billion in sales in the past 12 months. But it still looks like a smart investment opportunity.
Here are five reasons to buy Alphabet stock like there’s no tomorrow.
1. Secular trends
Alphabet is a leading internet enterprise that has its hands in various digital arenas. Consequently, it benefits from multiple secular trends.
Investors might already know that digital advertising is the company’s bread and butter. It commands more than 40% of the market globally.
The company is thriving as the media landscape has shifted to streaming entertainment. YouTube, which Alphabet purchased for less than $1.7 billion in 2006, accounts for the most TV viewing time in the U.S., even more than Netflix.
As IT spending moves off-premises, businesses that offer cloud computing services gain. Google Cloud, with its third-place market position, grew revenue by 29% and posted an 11% operating margin in the second quarter.
With its Waymo segment, Alphabet is aiming to introduce fully autonomous driving to the masses. While a riskier and more uncertain endeavor, this is yet another potential growth vector that could propel the business.
2. Financial position
There are very few companies that possess Alphabet’s financial fortitude. Its financials are in pristine condition.
This is one of the most profitable enterprises on the face of the planet. In Q2, Alphabet reported $23.6 billion in net income, which translated to a fantastic net profit margin of 28%. Even in 2022, a difficult period for the digital ad market, the company still registered a margin of 21%.
Investors don’t need to worry about Alphabet running into any financial issues. That’s because as of June 30, it had a net cash position of $87 billion on the balance sheet.
3. AI push
The artificial intelligence (AI) boom has lifted certain companies to new heights. But investors shouldn’t forget that Alphabet was already using the technology way back in 2001 in Google Search.
These days, virtually all of the company’s various products and services have AI embedded in them in one form or another, whether it’s Maps, YouTube, Gmail, or Google Cloud, to name a few examples. Alphabet has the ability to introduce new features to a user base of billions of people, a broad distribution that is a key advantage.
Alphabet will invest at least $12 billion per quarter on capital expenditures, mostly to build further AI-related technical capacity.
4. Network effects
Alphabet has arguably one of the world’s widest economic moats. As this is a platform company, network effects underpin its competitive position.
Google Search becomes more powerful as more information and data are created, which draws more internet users that want to access it. And this engagement is valuable to advertisers.
Furthermore, with so much content for anyone’s interests, it’s no surprise that YouTube has become such a popular streaming option. As more viewers spend more time on the service, content producers are incentivized to create even more.
5. Compelling valuation
Despite its impressive performance, shares trade at a forward price-to-earnings ratio of 20.8. That represents a discount to the broader S&P 500, which makes no sense to me, as Alphabet is a far superior company than the average one out there.
This valuation makes Alphabet the cheapest stock of all the “Magnificent Seven” constituents. That’s yet another reason to buy shares.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Netflix. The Motley Fool has a disclosure policy.
