This 'Global Elite' Tech Giant Is Going on Sale

We love investing in stocks that we call the "Global Elite"...

These companies dominate their industries... They have fortress-like balance sheets – and their brands and businesses are well-known all around the world.

We're always looking for buying opportunities in these kinds of businesses. When shares of great companies tumble, we get interested. And we could be seeing an opportunity in another Global Elite business right now...

Today, we're looking at one of the world's most dominant companies: Google's parent company, Alphabet (GOOGL).

Alphabet owns a ton of well-known businesses. From its search engine... to its Android smartphone software... to the YouTube video app... there's a good chance you interact with one of Alphabet's products every single day.

Its Android mobile operating system runs about 76% of smartphones worldwide (compared with 22% for Apple's iOS).

And its Google Chrome web browser is by far the leader in its industry. It holds around 66% of the market share. So every time someone gets on the Internet, there's about a two out of three chance that they're using Alphabet's browser.

And when it comes to streaming, YouTube is one of the most popular video sites out there. It has 2 billion monthly active users. That makes it the second-most visited site on the Internet, just behind Google (also owned by Alphabet). And it's ahead of social-networking giant Facebook (FB).

But Alphabet's crown jewel is its advertising business...

The advertising business generates massive amounts of cash flows and profits for Alphabet. Taken alone, it's potentially one of the most profitable businesses ever conceived.

Alphabet collected $148 billion in revenue from advertisers over the last 12 months... and not just from search results. Through its AdSense network, it posts ads on other websites and in its own popular services. This means Alphabet can reach billions of people with online ads.

The company's revenue is still growing at around 20% a year... And the online advertising business keeps growing, too...

Companies will spend more than $330 billion on digital advertising this year, according to data from research firm Statista. This represents a growth rate of 14% from 2018.

In addition to advertising, Alphabet also has businesses like self-driving-car project Waymo, its Google Fiber Internet service provider, the Nest home-automation system, Verily Life Sciences, and other high-concept technologies.

Over the past 12 months, these businesses have cost Alphabet about $3.9 billion. Out of almost $150 billion in revenue, that's a reasonably small price to pay.

All Alphabet needs is for one of these "Other Bets" to pay off to make up for these losses.

Consider Alphabet's bets on its Android operating system or YouTube...

People questioned why a search company would develop a free operating system for smartphones. But it paid off. As we mentioned above, the Android system is now far and away the leader in smartphone usage.

Its $1.65 billion purchase of YouTube in 2006 looked like an expensive buy-in for a money-losing, high-cost video-streaming platform. Estimates suggest that YouTube took in $9.5 billion in revenue in 2018, a 22% increase over 2017 – though Alphabet doesn't disclose how much profit the platform has made.

So search advertising is profitable, and it allows Alphabet to invest in these "moonshots."

The company's strong businesses ensure that it has a fortress-like balance sheet. It holds more than $120 billion in cash on its balance sheet, with only $14 billion in debt.

And it collects loads of free cash flow ("FCF"). Of Alphabet's $148 billion in sales over the past 12 months, more than $27 billion has trickled down to FCF. So for every $1 in revenue, more than $0.18 comes down to FCF.

Remember, the typical S&P 500 company would be lucky if it produced $0.10 in FCF for every $1 in sales. Alphabet's ratio is nearly double that.

With all this FCF, it can reward its shareholders.

While it doesn't pay a dividend, Alphabet does buy back its shares. In its most recent quarterly release, the tech giant announced a $25 billion stock buyback plan, equal to about 3% of its market cap. This was in addition to a $12.5 billion repurchase plan announced in January.

Looking at valuation, Alphabet trades at an EV/EBITDA (the ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization) of 16 times. For comparison, the S&P 500 trades at an EV/EBITDA of 13 times.

However, Alphabet completely dominates its industry, posts much thicker profit margins and cash flows, and is rapidly growing revenue and earnings. Its stellar business means that it deserves to be valued at a higher multiple than the S&P 500.

With global markets in turmoil in recent weeks, Alphabet's shares have fallen just under 10% from their all-time high in April. Trade tensions between China and the U.S. may have just presented a buying opportunity in this Global Elite business...

Alphabet dominates almost every aspect of the Internet. Its wide range of products ensure that the company reaches billions of users every day. And its "Other Bets" will keep providing great growth opportunities.

Sometimes investing is simple.