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Looking for some investing inspiration? This is my latest analysis of a stock that’s caught my eye. It’s not financial advice or a recommendation to buy – just for informational purposes. Keep an eye out each week for the latest share tips.
|Share tip||Alphabet (GOOGL)|
|Description||Alphabet is one of the world’s largest companies with a market cap of $1.35 trillion|
|Buy shares in Alphabet||Invest with IGCapital at risk|
Alphabet (GOOGL) – the basics
This week, we’re taking a look at a company so popular, the original name became a verb. I’m talking about Google, of course.
Listed on the Nasdaq stock exchange in the US, Google now technically falls under its parent holding company, Alphabet.
Alphabet has a whopping market cap of $1.35 trillion (about £1.1 trillion), making it one of the most valuable companies on planet Earth.
However, Alphabet isn’t all about Google search. There are several business streams:
- Advertising and email (Google, Gmail etc.)
- Phones and apps (Android software and Pixel mobiles)
- Social media (YouTube)
- Wearable health tech (Fitbit)
- Smart home products (Nest)
- Navigation (Google Maps and Waze)
In total, Google still handles more than 70% of worldwide online search requests. And the intelligent developments and acquisitions made by Alphabet (Google) over the years makes it one of the most unique and diverse brands ever devised.
History of the company
Google started from relatively humble beginnings in 1998, with the cliche scenario of a few smart friends in a garage (as most tech start-up companies seemed to begin over the last few decades).
Initially, the search engine was going to be called “Backrub”. To be honest, “Google” probably sounded just as silly. But today, I’m sure founders Larry Page and Sergey Brin switched things up.
After attracting funding from Silicon Valley investors, Google grew from strength to strength and organised a fairly unconventional IPO (initial public offering) in 2004. The Google IPO was unique because the company sold shares for $85 in a public auction, which put retail investors on more of a level footing with institutional investors.
From there, it only took 2 years before Google made it on the prestigious S&P 500 index, quickly becoming one of the most important companies in America.
Google became a household name everywhere and gradually evolved into one of the most valuable companies ever created. Back in 2015, the company restructured and was renamed as Alphabet – with Google becoming one of numerous subsidiaries under this new corporate holding company.
Current performance of Alphabet
Right now, the Alphabet share price is around $105 (£85). Like most technology stocks, Alphabet shares have had a tough time over the last year, dropping by about 25%.
After hitting highs of close to $150 back at the end of 2021, Alphabet has not been immune to the market conditions that have seen plenty of tech stocks knocked down by more than a peg or 2.
However, things might be about to turn as Alphabet stock is up by about 18% YTD (year-to-date). And if you zoom out and look at the progress over 5 years, the Alphabet stock price is up by over 100%. Remember that investing progress almost never happens in a straight line.
One quick thing to point out is that there are 2 types of Alphabet shares listed with 2 ticker symbols:
- Alphabet class A (GOOGL)
- Alphabet class C (GOOG)
This may seem confusing because the different Alphabet shares can trade at slightly varying prices, but the only real difference is that class A shares come with shareholder voting rights, whereas class C shares do not. So, class A shares sometimes trade at a slight premium. You may find that you can only access one type of shares on your investing platform.
In case you were wondering, there is also a class B. However, these shares don’t trade on stock exchanges and are exclusively owned by directors and founders (coming with 10 votes per share instead of one).
How to buy shares in Alphabet
- Choose a platform. If you’re a beginner, our share-dealing table below can help you choose.
- Open your account. You’ll need your ID, bank details and national insurance number.
- Confirm your payment details. You’ll need to fund your account with a bank transfer, debit card or credit card.
- Search the platform for stock code: GOOGL in this case.
- Research Alphabet shares. The platform should provide the latest information available.
- Buy your Alphabet shares. It’s that simple.
As it stands, Alphabet doesn’t pay any dividends; it hasn’t done so since the company went public and doesn’t have plans to make dividend payments in the foreseeable future. This is because the company believes funds are better used to reinvest for the long-term growth of the business.
In the Alphabet 2022 10-K filing (a yearly report provided to the SEC by US public companies), it described its dividend policy: “We have never declared or paid any cash dividend on our common or capital stock. The primary use of capital continues to be to invest for the long-term growth of the business. We regularly evaluate our cash and capital structure, including the size, pace, and form of capital return to stockholders.”
What lies ahead for Alphabet?
Placing various companies as subsidiaries under Alphabet allows the firm to be a bit more tight-lipped and tactical about the individual performances of each branch (like private companies can be).
However, the overall performance of Alphabet looks strong. In its 2022 fiscal year report, Alphabet reported revenues of just over $283 billion (up 10% from $258 billion in 2021). Alphabet’s P/E (price-to-earnings) ratio is just over 23, which is pretty attractive for a high-growth tech stock.
After a recent uptick in the Meta Platforms (META) share price following an announcement of trimming the employee numbers, some investors are wondering if Alphabet shares will follow suit upwards.
Like most tech companies, Alphabet has also been reducing its workforce. Earlier in the year, the company announced it was lowering its staff numbers by around 12,000. Although this is estimated to cost about $1.9 to $2.3 billion in severance and related costs, it will make the firm leaner moving forward.
The sheer diversity of revenue streams makes Alphabet an interesting investment prospect. Although it’s all tech-related, the company is involved in hardware, software, cloud services – and everything in between.
Another big tick in favour of Alphabet is that it has somewhat of an existing “frenemies” relationship with Apple (AAPL). One of the major reasons companies like Meta have suffered recently was due to lower advertising revenue after Apple tightened its data privacy policies.
Although Alphabet delivers rival hardware and software to Apple, Google made a deal to become the default search engine for Apple’s Safari web browser. Google still pays Apple a big chunk of money for these rights, but its presence on both Apple and Android software is great business for the advertising arm of Alphabet.
What to be aware of
Although Alphabet looks strong, showing solid growth and appearing to be tracking back towards all-time highs for the share price, there are some key areas to be aware of for those thinking about investing:
- A continuing economic environment of high inflation and rising interest rates is challenging for tech stocks like Alphabet.
- Alphabet invests heavily in growth and acquisitions, which can be risky and expensive.
- Its relationship with Apple is positive but could become extremely expensive moving forward.
- Although Alphabet has diverse subsidiaries, the original Google advertising model is still the most important.
- Changes to data privacy rules can be very costly to tech advertising companies (as we’ve seen with Meta).
- Alphabet faces fierce competition in almost every area of its business (for example, TikTok in video social media). And the company is now so big, it becomes difficult to be agile and manoeuvre itself.
- AI (artificial intelligence) could supersede Google’s search engine algorithms. New AI-based software like ChatGPT could also lead to challenges.
- It’s difficult for a business as big as Alphabet to pivot and adapt if needed.
- Technology is an ever-changing industry, and it’s hard to predict how new tech will impact the world and businesses.
- Alphabet has faced some past privacy issues. If it oversteps boundaries, it could face massive fines.
- At the moment, Alphabet is facing an advertising monopoly lawsuit from the US Justice Department. If Alphabet loses, it could face huge fines or change how the business works.
- Companies like Amazon are starting to eat into Alphabet’s online advertising market share.
The bottom line on Alphabet
Alphabet is looking strong from both a business and financial perspective. The company has proven over the years that it can maintain growth by taking calculated risks whilst staying focused on its core money-making advertising business. The whole tech sector is suffering, but I don’t believe this will last forever.
When the market picks up, and technology stocks get some breathing room, I think Alphabet will remain among a few stand-out investment opportunities. What sets Alphabet apart from other huge US tech stocks is its diversity of interests. Sure, some bets may not pay off, but investing in Alphabet has proven time and time again to be solid. The company looks like it’s around to stay, and Alphabet shares could be a useful long-term tech stock investment for investors who want a solid foothold in the fast-moving technology sector.
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