The list of the most popular companies on Robinhood Markets (HOOD 4.44%) is not a great hunting ground for potential investments, if recent history is any indication. From speculative biotechnology and cannabis companies to meme stocks to busted IPOs, many of the 100 most widely held stocks in the trading app users' portfolios have greatly underperformed the market in the past year. However, not all Robinhood Top 100 stocks are set to disappoint investors. One that caught my eye is Alphabet (GOOG 9.96%), the owner of Google, YouTube, and the Android operating system.
Here's why Alphabet is set to crush the market in the long run.
Image source: Getty Images.
Google keeps chugging along
Even though the company is now structured as a conglomerate, the majority of Alphabet's business still comes from Google Search and other associated Google products. In the first quarter of 2022, its search revenue hit $39.6 billion, up from $31.8 billion in the prior-year period. That search business is the largest in the world, generating over $100 billion in annual revenue, and has helped propel Alphabet's value into the stratosphere over the past decade.
But don't think growth is set to slow down anytime soon. With over 90% market share among search engines worldwide, Google should get a steady tailwind as more people get access to the internet and current users spend more time online. As of the end of 2021, it was estimated that 5.2 billion people -- 66.2% of the global population -- used the internet. The percentage has ticked upwards every year since 1995, and there's no reason to think it won't eventually get to nearly 100%. With a projected global population of 8.5 billion in 2030, Google could have upwards of 3 billion more people using its search engine by the end of this decade. This should at least keep its search revenue growing at a solid annualized rate of 10% or more for the foreseeable future.
GOOG Revenue Per Share (TTM) data by YCharts
YouTube, Google Cloud, and Other Bets
Beyond its core Google products, Alphabet has a few other businesses to fill out its conglomerate. I like to separate them into three categories: YouTube, Google Cloud, and Other Bets.
Do-it-yourself video platform YouTube has grown like gangbusters since Alphabet acquired it back in 2006. With an estimated active user base of close to 2 billion, it is now one of the most powerful media and content platforms in the world. In Q1, YouTube generated $6.9 billion in advertising revenue, up from $6 billion a year prior. That's not nearly as much as Google Search, but the business could still be a solid growth driver for Alphabet this decade.
Google Cloud is a cloud computing service that competes with Amazon Web Services (AWS) and Microsoft Azure. Google Cloud was launched back in 2008 and is now one of the largest providers in the industry with an estimated 10% market share. Over time, this should be quite lucrative, given that analysts expect the cloud computing market to be worth more than $1 trillion by 2030. In Q1, Google Cloud generated $5.8 billion in revenue and had an operating loss of $931 million. The unprofitability is a bit concerning, but considering that AWS generates 30%-plus operating margins on a similar business model, I'm confident that Alphabet will be able to shift the division to profitability whenever it wants to. When this happens, it will also be accretive to Alphabet's consolidated profit margins.
Lastly, there's the Other Bets segment -- Alphabet's moonshot division. It is hard to put concrete values on these initiatives, but the money it pours into them gives the company lots of optionality over the coming decades. The only potentially relevant business in the near term (at least for shareholders) is Waymo, one of just two companies operating legitimate self-driving taxi services. So far, it's only carrying passengers in two markets: Phoenix and San Francisco. But the plan is to scale the service out to many cities over the next decade.
Valuation is quite attractive
Over the last 12 months, Alphabet has generated $82.4 billion in operating income, and in Q1, it had an operating margin of 30%. With a market cap of $1.54 trillion, the stock trades at a trailing price-to-operating-income ratio of 18.7. Considering the steady growth of search, plus the potential of its other subsidiaries, it is not crazy to believe the company could grow its top line at a 10% or higher annualized rate for the foreseeable future. And if it can expand its operating margins at the same time, operating income would expand at an even faster rate.
On top of the solid growth, Alphabet also returns tens of billions of dollars to shareholders each year via share repurchases. In Q1, it spent $13.3 billion on stock buybacks and authorized a new $70 billion repurchase program. The steady reduction in the number of shares outstanding should help boost its free cash flow per share, the key metric driving shareholder returns over the long haul.
With all these positive growth factors and a valuation multiple that's below the market average, Alphabet looks primed to put up great returns for shareholders this decade.
