Al­pha­bet, a US multi­na­tional with a mar­ket value of R12.45 tril­lion

The Star Early Edition - - BUSINESS REPORT | FOCUS - FRANTS PREIS

AL­PHA­BET is an Amer­i­can multi­na­tional tech­nol­ogy con­glom­er­ate with a mar­ket value of $856 bil­lion (R12.45 tril­lion).

It was cre­ated through the re­struc­tur­ing of Google in 2015. Google is a mar­ket leader in the search and on­line ad­ver­tis­ing mar­kets, and is con­sid­ered one of the big four tech­nol­ogy com­pa­nies along­side Ama­zon, Ap­ple and Face­book.

The com­pany ac­quired its name from the word “googol”, a math­e­mat­i­cal term rep­re­sent­ing one fol­lowed by one hun­dred zeros.

It sig­ni­fies the search en­gine’s ca­pac­ity to of­fer ac­cess to the vast amount of in­for­ma­tion on the in­ter­net. Its web-based search en­gine aver­ages 65 000 searches ev­ery sec­ond.

In one of cor­po­rate his­tory’s great­est blun­ders, Ya­hoo refused to buy Google’s search en­gine tech­nol­ogy for $1m in 1999. Three years later Ya­hoo of­fered to buy Google for $3 bil­lion, but was un­will­ing to pay the $5bn Google wanted. To­day Google is worth more than 160 times that amount.

Al­pha­bet’s rev­enues are pri­mar­ily gen­er­ated from busi­ness ad­ver­tis­ing on Google’s own web­sites and from ad­ver­tis­ing space on third-party web­sites. Its busi­ness seg­ments are Google and Other Bets.

The Google seg­ment in­cludes its in­ter­net prod­ucts such as Search, Ads, Com­merce, Maps, YouTube, Google Cloud, An­droid, Chrome and Google Play.

The Other Bets are early-stage, ex­per­i­men­tal busi­nesses with enor­mous long-term po­ten­tial. This in­cludes au­ton­o­mous driv­ing and vir­tual re­al­ity.

Although this seg­ment re­mains un­prof­itable, man­age­ment has re­it­er­ated that Al­pha­bet con­tin­ues to in­vest mean­ing­fully for the long-term op­por­tu­ni­ties they see.

Al­pha­bet has ac­quired over 220 com­pa­nies since 2001, which is roughly one ac­qui­si­tion per month.

The com­pany’s most re­cent quar­terly re­sults beat ex­pec­ta­tions on vir­tu­ally all met­rics. Google’s ad­ver­tis­ing rev­enue in­creased 16 per­cent.

Given the com­pany’s high de­pen­dence on ad­ver­tis­ing rev­enues, it is en­cour­ag­ing that its non-ad­ver­tis­ing rev­enue soared by 40 per­cent.

This was largely due to the strength of Google Cloud prod­ucts and Google Play. Al­pha­bet also an­nounced a mas­sive $25bn share re­pur­chase plan.

Although this is only 3 per­cent of its own mar­ket cap­i­tal­i­sa­tion, it is equiv­a­lent to the mar­ket value of Capitec, Ned­bank and Absa com­bined.

Po­ten­tial chan­nel con­flicts be­tween search re­sults and the com­pany’s own ser­vices could di­min­ish Al­pha­bet’s dom­i­nance in the in­ter­net space.

Although the new an­titrust probe opened by the US de­part­ment of Jus­tice raises some concern, it isn’t new to Al­pha­bet.

They op­er­ate un­der strict reg­u­la­tion, be it on pri­vacy, com­pe­ti­tion, copyright or in­tel­lec­tual prop­erty and they have en­coun­tered many sim­i­lar cases be­fore.

Data leak­age or political force to sup­ply user data could pos­si­bly also re­sult in di­min­ish­ing user trust and search traf­fic ero­sion.

How­ever, Al­pha­bet’s undis­puted lead­er­ship in the search en­gine space, high in­no­va­tion rate, di­ver­si­fi­ca­tion into non-ad­ver­tis­ing busi­ness models and strong fi­nan­cial po­si­tion bode well for its long-term growth.

Its strong brand name and su­pe­rior search al­go­rithms en­able Al­pha­bet to at­tract high user traf­fic and gen­er­ate switch­ing costs due to users’ fa­mil­iar­ity with the en­gine.

They are poised to ben­e­fit from growth in wear­able in­for­ma­tion tech­nol­ogy and In­ter­net of Things by lev­er­ag­ing their huge user base.

At an un­de­mand­ing for­ward priceto-earn­ings mul­ti­ple of 18 Al­pha­bet is a sen­si­ble ad­di­tion to in­vest­ment port­fo­lios. Frants Preis, CFA, is a port­fo­lio man­ager at Vega Asset Man­age­ment based in Pre­to­ria. Al­pha­bet shares are owned on behalf of clients.

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