Alphabet (GOOGL -0.43%) (GOOG -0.34%) is the parent company to a household name in technology: Google. Many of us rely on the company's multitude of services, ranging from simple web searches to Gmail to Google Maps.
The company makes a veritable mint from the ad revenue that it generates from these services, pulling in $136.8 billion in revenue and an eye-popping $30.7 billion in net income in 2018. After all, if a large portion of the world's population relies on its suite of services, advertisers are going to be quite keen to get those eyeballs looking at their ads.
Image source: Alphabet.
To that end, I'd like to go over three reasons why Alphabet stock is a buy today.
Investing in the future
Alphabet's Google has a reputation for attracting and retaining many of the industry's best technical minds -- and compensating them extremely well, too. That reputation is well-deserved and backed by the company's massive (and growing) investments in research and development spending.
In 2018, the company laid down $21.4 billion in research and development -- a figure that was up significantly from $16.6 billion in the prior year. According to Alphabet CFO Ruth Porat, the company intends to keep growing its operating expenses in 2019, and that growth "will remain concentrated in R&D."
Check out the latest Alphabet earnings call transcript.
Although rising operating expenses serve to ding near-term profitability, I'm actually very encouraged that Alphabet continues to invest heavily in its future. The company's current success is undoubtedly the product of investment decisions that management made years ago, and my expectation is that its investments today will ensure that it builds on that success in the coming years.
Strong core business
Although Alphabet gets a lot of press for some of the things that it does outside of its core advertising business, such as consumer hardware and self-driving cars, it's usually much better for a company's shareholders if it can pursue those growth opportunities with the comfort and stability afforded to it by a robust core business.
The good news for Alphabet's shareholders is that the company's core business remains extremely strong.
Last quarter, Alphabet saw its sales rise 22% year over year (23% in constant currency), with operating income up 7% to $8.2 billion. Underpinning that growth was 19.9% surge in the company's core advertising revenue (83.1% of total revenue), as well as a nearly 31% rise in the company's "Google other revenues" (which includes the company's consumer hardware sales).
The strength in the core business not only fuels revenue and profit growth for shareholders today, but it should continue to afford the company significant latitude to make big bets in other areas in the future -- some of which could pay off hugely.
Robust growth prospects
According to analyst consensus, Alphabet's growth is set to continue to be strong over the next couple of years. For its fiscal 2019, analysts expect the company to see revenue rise to $163.7 billion -- up 19.6% year over year. Earnings per share (EPS) is also set to surge to $46.97, up from $43.70 in the same period a year ago, representing 7.5% growth. In the year after that, revenue is expected to rise 17.8% to $192.8 billion, with EPS surging 16.5% to $54.72.
Now, those estimates could either prove too conservative or too aggressive, but if we assume that Alphabet's growth over the next two years comes in roughly as analysts expect, then the company's prospects look really solid.
It's a rare and wonderful breed of business that can consistently deliver double-digit revenue growth from a baseline as large as Alphabet's, and yet the company looks set to continue to do that in the coming years.
Investor takeaway
Alphabet is an incredible business that appears to have a sharp leadership team at the top calling the shots. The core business is in great shape and the company's growth opportunities -- both within the core segment and beyond -- appear robust, cultivated by years of diligent investments in the right markets and in bringing aboard some of the industry's best talent.
If you're looking for the financial stability of a very large company coupled with the growth prospects of a much smaller, more nimble company, Alphabet sure seems to fit the bill.
