What stock is the best pick to buy right now?
That's not an easy question to answer. There are plenty of great stocks on the market. Some are undervalued and shouldn't stay that way for too much longer. Some continue to soar with no signs of slowing down. Some are simply excellent businesses to own for the long term.
Its core business is a cash cow
In many respects, cash truly is king. Businesses that don't generate strong cash flow can find themselves in a position where they can't invest for the future. Or they can wind up borrowing so much money that the debt causes problems. On the other hand, companies with a solid cash flow and plenty of cash can make the investments that lead to higher growth and reward shareholders through share buybacks and dividends.
Over the last 12 months, Alphabet's free cash flow topped $20 billion. As of the end of Q1, the company's cash stockpile stood at nearly $103 billion, including cash, cash equivalents, and marketable securities.
Alphabet's core business is without question a cash cow. And the company's core business is advertising. More than 85% of Alphabet's total revenue comes from customers paying it for online advertising. Much of that revenue stems from Alphabet's own sites, including its Google search engine, Google Maps, Gmail, and YouTube. A lot of revenue also comes from the growing network of third parties that use Google's advertising programs to deliver ads on their websites.
The company has chosen so far to use its cash to invest in its business and repurchase shares rather than initiate a dividend program. Last year, Alphabet invested over $16.6 billion in research and development (roughly 15% of total revenue) and bought back nearly $5.2 billion of its stock.
It has a strong moat
Of course, plenty of companies that were once cash cows no longer deserve that designation. I think Alphabet will keep on mooing for a long time to come thanks to its strong moat.
The castles in medieval times were often surrounded by water to protect them from attacking enemies. What's the equivalent for Alphabet today? There are quite a few competitive advantages that provide a strong moat for the company.
Consider that Google has become a verb. If you need to look up something, you Google it. Suppose someone gave you $1 billion to invest in starting a new business. Would you start a new search engine? I seriously doubt it, unless you wanted to throw the money away. Google is simply too dominant. Sure, Microsoft was able to achieve success with its launch of the Bing search engine several years ago. However, Bing's rise came at the expense of other search engines -- not Google.
There's also a network effect at work for Alphabet. The more people use its products, the more valuable its network becomes. And that leads to even more people using its products, which leads to... you get the picture.
Poised to win big in new markets
Alphabet wouldn't be my top stock to buy in July if it was only playing defense, though. But the company is definitely playing offense, too, with initiatives in several growth markets. I think that Alphabet is poised to become a big winner in several of these markets.
At the top of the list is self-driving cars. Alphabet's Waymo subsidiary is a clear leader in self-driving car technology. One analyst, Morgan Stanley's Brian Nowak, even thinks that Waymo could be worth $70 billion all by itself.
Alphabet also has its head in the cloud. The company is offering its cloud platform at lower costs than key competitors. In addition, Alphabet is beefing up its security and delivering faster processing.
Another area where Alphabet could achieve significant success is in healthcare. The company's Verily subsidiary is working with several big partners to develop miniaturized continuous glucose monitors (CGM), contact lenses that can detect glucose levels, artificial intelligence technology for the early detection of eye diseases, surgical robot systems, and a molecular map of inflammatory disease. And that's only a partial list of Verily's initiatives.
Why buy in July?
Could the stock market pull back later this year and provide an even better buying opportunity for Alphabet? Maybe. However, there's no guarantee that will happen, even with rising tensions over trade. There's an old investment saying that "markets climb on a wall of worry." We could see that adage play out through the rest of 2018.
There's nothing special about July that makes it the ideal month to buy Alphabet stock. But, to use another old saying, there's no time like the present. In my view, anytime is a good time to buy this solid tech stock.