➡️ This is a step-by-step stock review to determine if Alphabet (GOOGL) stock is a good buy. In this article, we’ll help you understand the company, where the company is going, the competition, and the leadership. This way you can make a more confident investment decision.
Google or otherwise known by its parent company name, Alphabet, is a multinational holding company headquartered in Mountain View, CA and office locations in the US, Brazil, Colombia, Argentina, Mexico, Chile, Denmark, Netherlands, Greece, Germany, Belgium, Ireland, UK, Spain, France, Poland, Austria, Switzerland, Thailand, Hong Kong, India, Australia, Taiwan, and more.
Table of Contents
- Step 1: Tykr Rating
- Step 2: Google Company History
- Step 3: Google Business Model
- Step 4: Google News
- Step 5: Google Competition
- Step 6: Google 4Ms
- Step 7: Is Google stock a good buy?
Step 1: Tykr Rating
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this for us automatically. The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make.
- Summary: On Sale
- Score: 17/20
- MOS: 80%
- Share Price: $2,230
- Sticker Price: $11,213
The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
Step 2: Google Company History
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition.
- In 1996, Google began as a research project by Larry Page and Sergey Brin. Both were PhD students at Stanford. There was an unofficial third founder, Scott Hassan, who wrote most of the code but left the company before Google was officially founded. Hassan went on to pursue a career in robotics and founded Willow Garage in 2006.
- At the time, conventional search engines ranked results by counting how many times the search terms appeared on the page. They came up with an algorithm that analyzed relationships among websites and called this PageRank. It works by determining a website’s relevance by the number of pages and the importance of those pages that link back to the original site.
- The official name of the search engine was “BackRub” because the algorithm checked backlinks.
- Eventually, they changed their name to Google, a play on the word “googol” which is 10^100 (1 followed by 100 zeros).
- On September 15, 1997 they registered the domain name google.com.
- In 1998 the company was incorporated with its base of operations in Menlo Park, CA.
- In 1998 they received their first investment of $100K from Andy Bechtolsheim, co-founder of Sun Microsystems.
- In 1998, more investors joined the party including David Cheriton, Jeff Bezos, and Ram Shiraram, investing about $1M total.
- In 1999 they received VC funding from Kleiner Perkins and Sequoia Capital, raising another $25M.
- In 1999 they moved its officers to Palo Alto, CA.
- In 2000, Google began selling advertisements associated with search keywords and called this product Google Adwords. To maintain a clean design, they first introduced solely text-based ads.
- In 2000, Yahoo! Made Google its default search provider, replacing Inktomoi.
- In 2001, Google’s investors felt the need to have strong internal management. They hired Eric Schmidt as the chairman and CEO. Up until hiring Schmidt, Larry and Sergey declined multiple candidates because they still wanted control over the company. Increased pressure came from Sequoia Capital who demanded that Larry and Sergey pay back their investment of $12.5M unless they fulfilled their demand to hire an experienced business professional as CEO. Eric was apprehensive to join because the company wasn’t widely recognized at the time but to instill confidence in Larry, Sergey, and the other investors, he invested $1M of his own capital to solidify his commitment and belief in the company.
- In 2002, the Google verb was first used on a TV episode of Buffy the Vampire Slayer.
- In 2004, Google went public.
- In 2005, Google acquired Android for $50M.
- In 2006, Google acquired Youtube for $1.65B in Google stock.
- In 2008, Google acquired DoubleClick for $3.1B.
- By 2011, Google was handling approximately 3 billion searches per day. To handle this workload, Google built 11 data centers around the world with several thousand servers in each location.
- In 2011, the monthly unique visitors surpassed one billion for the first time.
- In 2012, Google acquired Motorola Mobility for $12.5B, its largest acquisition to date. This purchase was made to help Google gain Motorola’s patent portfolio on mobile phones and wireless technology to help protect Google in its ongoing patents with other companies including Apple and Microsoft.
- In 2013, Google acquired Waze for $966M.
- In 2013, Google launched Calico, a research and biotech company focusing on diseases caused by aging.
- In 2014, Google acquired DeepMind Technologies, a privately-held AI company in London.
- In 2015, Google announced the brands that Google owned would fall under the new holding company Alphabet. The purpose for this restructure was to keep the other brands separate from Google.
- In 2015, Sundar Pichai was appointed CEO after previously serving as Product Chief.
- In 2019, Google joined the video game industry by introducing cloud-based platform Stadia.
- In 2019, former PayPal COO Bill Ready became Google’s new commerce chief where he focused his attention on Google Pay.
- In 2021, Google reportedly paid $20M for Ubisoft ports on Stadia.
Step 3: Google Business Model
How does Google make money?
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy.
Google Services – Accounts for about 92% of revenue and was first introduced with Google Adwords in 2000. Most of the revenue is generated through advertising on platforms including Google Adwords, Google Chrome, Google Maps, Google Play, Google Search, and Youtube. Other sources of revenue under the services category include apps, in-app purchases, digital products, hardware, and fees from subscription services including YouTube Premium and YouTube TV.
Google Cloud – Accounts for about 8% of revenue and was first introduced in 2011. Google Cloud is a hosting environment competitive to AWS (Amazon) and Azure (Microsoft) where businesses can host their applications and data.
Both revenue channels are highly scalable. With online advertising, spending around the world was estimated to be about $378B in 2020 and is expected to reach $646B by 2024. That’s 70% growth in just four years. With Google Cloud, enterprise customers will pay hundreds of thousands on up to millions of dollars per year to host their applications and data.
Here are some of the companies that host with Google Cloud.
- Unilever
- Nintendo
- PayPal
- Macy’s
- Ulta
- Spotify
- HSBC
- Renault
- Target
- AT&T
- Home Depot
- Toyota
- BBVA
- The New York Times
- Discovery Channel
- Shopify
- Goldman Sachs
Alphabet has acquired over 250 companies. Some of the most popular acquisitions include:
- Youtube
- Android
- Waze – GPS software
- Fitbit – Wearables
- Mandiant – Cybersecurity
Alphabet also has CapitalG, a private equity firm for growth-stage technology companies. Some of the companies they’ve invested in include:
- Airbnb
- Stripe
- Lyft
- Zscaler
- duolingo
- Cloudflare
- freshworks
- glassdoor
- LendingClub
Step 4: Google News
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
This article from zacks.com states that Google will complete a 20-1 stock split on July 15th. A stock split doesn’t mean investors become wealthier but it does lower the barrier to entry. In other words, a stock split naturally motivates more investors to buy shares which benefits all investors.
This article from invezz.com states that Netflix is eyeing up Google as its ad partner. Netflix will soon be introducing a free tier with ads. This business model has proven to work well for Hulu and Netflix will offer a similar product with the potential that Google will power the advertising. This could be a win-win for Google and Netflix.
This article from seekingalpha.com states that Google will most likely see continued growth due to the increasing popularity of Youtube. Youtube is not only used for entertainment but it’s also a top platform for news and education. When it comes to video platforms, Youtube has 76% of the market share whereas Vimeo is a distant second at 19%. Youtube now has over 2 billion monthly users, Youtube shorts average 30 billion daily views and has grown by 400% in the last year, and 700 million hours of Youtube content are watched on TVs every day.
This article from fool.com highlights why Google is the best investment of the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google). Today, 92% of searching and browsing on the internet are completed on Google. It is the most-visited website in the world, with 44 billion visits per month. The second most visited website behind Google is Youtube with 28 billion visits per month. Facebook comes in third at 3 billion visits per month. When it comes to smartphones, 86% of smartphones are powered by Android.
For the latest news on this stock, please login to Tykr.
Step 5: Google Competition
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
Amazon (AMZN)
- Summary: On Sale
- Score: 11/20
- MOS: 69%
- Share Price: $108
- Sticker Price: $353
- Revenue: $469B
Microsoft (MSFT)
- Summary: On Sale
- Score: 17/20
- MOS: 68%
- Share Price: $253
- Sticker Price: $787
- Revenue: $168B
Rackspace (RXT)
- Summary: On Sale
- Score: 10/20
- MOS: 80%
- Share Price: $6
- Sticker Price: $32
- Revenue: $3B
Step 6: Google 4Ms
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
✅ MOS: With a score of 44/100, this shows the overall financial strength of the company is okay but could use some help. With a MOS of 61%, this shows this stock has a lot of upside potential.
✅ Meaning: The various revenue streams under Google and various businesses under Alphabet make this company a very powerful revenue generator. Google Services is primarily an advertising-based business model which accounts for 92% of revenue. Google Cloud is a PaaS (Platform as a Service) business model which accounts for 8% of revenue. I love SaaS, IaaS, and PaaS revenue models because of the recurring revenue streams but there are two business models I consider superior. Those models include transaction fees which you see with business models such as PayPal and Square along with advertising fees which you see with Google and Facebook. Both transaction fees and advertising have low friction and high scalability. Knowing that 92% of revenue is generated from this model is a great sign.
✅ Moat: The competitors listed above (Amazon, Microsoft, and RXT) offer competitive products to the Google Cloud hosting platform. Amazon’s AWS controls 33% of the market, Microsoft’s Azure controls 22% of the market, and Google Cloud controls 10% of the market. This shows that Google is the underdog when it comes to hosting which is okay. Google has some impressive brands on the platform and will certainly add more brands over time. Although the hosting platform has competition, the advertising model is in a class of its own. Sure, Facebook has a powerful advertising model but based on the views listed earlier in this article, Google and Youtube have taken the #1 and #2 spots in the market.
✅ Management: Sundar Pichai is currently the CEO of Alphabet. He started his career as a product manager at Applied Materials and worked in management consulting at McKinsey & Company. He joined Google in 2004 where he led product management and innovation efforts on products including Chrome, Chrome OS, Google Drive, Gmail, and Google Maps. In 2014 he was a contender for Microsoft’s CEO position which eventually went to Satya Nadella. In 2015 he became CEO of Google and in 2019 he became CEO of Alphabet. What I like most about his career is that he’s worked at Google for nearly 20 years, focusing his efforts on various product lines. This provides him with an overarching understanding of the market and competition.
If you’re interested, you may complete your own 4M checklist on this stock or other stocks by logging into Tykr.
Step 7: Is Google stock a good buy?
It’s hard to say anything bad about this stock. In fact, this is turning out to be one of my best investments in the last year. Sure, the market, and this stock, are down now but this stock is poised to take off like a rocket.
If you don’t already know, I was a shareholder of Visa for years but in 2021 Visa delivered a return of about 3% compared to the S&P500 return of around 26%. Due to the poor returns, limited revenue streams, and the stock sustaining a Tykr summary of Watch, I sold my shares of Visa for a profit in December of 2021 and piled those profits into Google.
Here are a few reasons why I’m buying more.
- The financials are incredible with a score 17/20.
- The MOS of 80% shows this stock has high upside potential.
- The 20-1 stock split is happening on July 15th. Mark your calendar! The retail investor segment will most likely buy more.
- Google and Youtube are advertising revenue business models. (Low friction and highly scalable).
- Google and Youtube have very little competition.
If you don’t own Alphabet but are considering buying it, this is your chance. As of June 2022, the Nasdaq is down 31% and the S&P 500 is down 21%. This is the best stockpiling event we’ve seen in 14 years. Now is the time to take action.
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The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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