The Two Tailwinds That Are Great News for This Tech Giant
Today, we're highlighting another member of the "Global Elite"...
As regular readers know, here at Stansberry Research, we use this term to describe the best companies in the world. Global Elite companies usually hold the dominant positions in their market. And because of this, there's usually tons of demand for these businesses.
And that allows them to have fortress-like balance sheets, along with consistently growing sales and cash flows. Because of this, shares of Global Elite businesses command premiums in the market, making them more expensive than most stocks.
We highlighted this theme last month with Apple (AAPL), which is the leader of the consumer-electronics market. Today's company dominates an industry that has become extremely important in today's technological age – the Internet...
Alphabet (Nasdaq: GOOGL) owns a ton of well-known businesses. From its Google search engine, to its Android smartphone software, to the YouTube video service, there's a good chance you interact with one (or more) of Google's businesses every single day.
Its Android mobile operating system is far and away the leader in the global smartphone market. As of January, Android runs about 72% of shipped smartphones (compared with 27% for Apple's iOS).
Its Google Chrome web browser also dominates its industry. It holds about 66% of the market share. So every time someone gets on the Internet, odds are good they're using Google's browser.
YouTube now has 2 billion monthly active users. Not only does that make it the second-most-visited site on the Internet, just behind Facebook (FB), but it also accounts for one-third of all Internet users.
Alphabet's crown jewel is the advertising business...
Through its AdSense network, Google posts ads on other websites and in its own popular services. This means Google can reach billions of people with online ads.
The advertising business generates massive amounts of cash flows and profits for Alphabet. It accounts for about 90% of the company's sales, and all of its operating profits. Taken alone, it's potentially one of the most profitable businesses ever conceived.
And Alphabet's recent quarterly report was more evidence of its Global Elite status. It reported fourth-quarter earnings per share ("EPS") of $22.30 versus the $15.77 estimate. Revenue for the quarter was $56.9 billion, beating the expectation of $52.7 billion.
CEO Sundar Pichai attributed the strong quarter to "the accelerating transition to online services." Alphabet's CFO Ruth Porat echoed this, saying that strong performance in advertising on Google and YouTube drove overall strength in the quarter. Porat also said that the company has seen business activity recover from earlier in the year.
As the pandemic hit, many companies pulled back on spending plans... The main industry that suffered was travel, which makes up about 8% of total ad spending, according to Morgan Stanley. But around the fall, the situation began to change. Companies that rely on advertising – like Alphabet and Facebook – began seeing increased demand as advertisers shift to online platforms.
This trend is only just getting started... Market-research firm GroupM estimated that 49% of all advertising spending was done online in 2020, up from 40% in 2018. And the firm predicts that online ad spending will make up 60% of the market ($151 billion) by 2024.
Alphabet is set to dominate as ad spending goes online. It's in a duopoly in the online advertising market with Facebook. These two companies account for more than 70% of all online advertising spending.
Advertising isn't the only massive technological trend serving as a tailwind for Alphabet...
The company's cloud business is also set to get a boost as people continue to work from home. We've noted this powerful trend in recent months with stocks like DocuSign (DOCU), Palo Alto Networks (PANW), and Zendesk (ZEN). Alphabet is also benefiting...
Porat also noted that Google Cloud revenue grew by 46% to more than $13 billion in 2020. She added that this segment has "significant ongoing momentum." As people continue to work from home, there will still be elevated demand for cloud storage. And lots of businesses are going to turn to Alphabet's offerings.
Alphabet's price action shows the kind of gains possible when investing in the Global Elite. Between February 2016 and February 2020, Alphabet's shares marched steadily higher, more than doubling over that period. Then the pandemic hit...
Like the rest of the market, Alphabet's shares sold off sharply in March (dropping 30%) as fear gripped the markets. But once the dust settled, Alphabet's shares resumed their uptrend. Since bottoming on March 23, Alphabet's shares have surged more than 90%, and they just hit a fresh all-time high.
Alphabet dominates the Internet. And its business is getting boosts from two huge online trends. That should propel this Global Elite company even higher.
Sometimes investing is simple.