Four years may not sound like a long time, but life moves pretty quick. Even big events fade from memory rather quickly. For instance, do you remember that in 2019:
- Tom Brady won his sixth Super Bowl as quarterback of the New England Patriots?
- Notre Dame Cathedral suffered a devastating fire?
- "Old Town Road" was the year's No. 1 song?
If not, that's OK -- I never liked "Old Town Road" anyway.
More to the point, 2019 was a fantastic year for the stock market. The S&P 500 logged a 31.5% return -- the second-best yearly performance for the index in the last 25 years.
Incidentally, if you had invested $25,000 into shares of Alphabet (GOOG 9.96%) (GOOGL 10.22%) on Jan. 2, 2019, you'd have $43,800 today. That equates to an impressive 75.3% gain.
Of course, investing is about the future -- not the past. So, should investors expect a similar return for Alphabet shares over the next four years? Maybe more? Maybe less?
Here's what three Fool.com contributors have to say.
Image source: Getty Images.
I wouldn't bet against Alphabet shares doubling over the next four years
Jake Lerch: There's no secret to Alphabet's success. The company reigns supreme in the internet search market. Some studies estimate Google's market share at over 90%.
With so much traffic, it's no wonder the company can cash in by selling hyper-targeted ads on its platform that generate massive sales for the company. Indeed, Google Search contributed more than $162 billion in full-year 2022 revenue -- 57% of its total revenue.
However, when thinking about the next four years, the big question is this: Can Alphabet maintain its near-monopoly of internet search?
Competitors are eager to take market share; Microsoft made a splash by integrating ChatGPT into its Bing search engine. What's more, there are regulatory risks, including a recent antitrust lawsuit brought by the U.S. government.
Yet both of these threats fail to measure up in my mind.
Let's start with ChatGPT/Bing. It's cool; it's fun. But, is it a sea-change in how most of the world searches, or just a flash in the pan? I think it's the latter. Most people who use Google Search have been doing so for years. It's a hard habit to break. And I think Microsoft will find it difficult to meaningfully reduce Google's market share.
As for the regulatory concerns, they're real, and Alphabet will take a hit from legal costs at the very least. But I don't see a government-enforced breakup in the company's future. Moreover, the buzz around Bing/ChatGPT somewhat undercuts any argument that consumers and advertisers have no alternative to Google.
Alphabet's dominance of internet search is the main reason its stock gained 76% over the last four years. The company faces threats to its overwhelming market share, but not insurmountable ones. Thus, I think Alphabet is well on its way to reproducing a similar return over the next four years.
Alphabet's golden goose faces potential disruption
Justin Pope: Most people have at least heard about Microsoft's partnership with ChatGPT developer OpenAI and its upcoming revamped Bing search engine. There are differing opinions about whether Bing will threaten Alphabet's Google Search, which has dominated as the world's leading search engine for years. Of course, Alphabet recently unveiled its version of ChatGPT in Google Bard, which will soon integrate artificial intelligence (AI) capabilities into Google Search. But investors shouldn't focus narrowly on whether Bing will threaten Google Search. Instead, investors should step back and ask how AI could change search engines altogether.
Today, a search engine like Google uses autonomous bots (crawlers) to store and organize web pages across the internet. When you enter a search, Google can refer to that information, showing you relevant links (on the results page). This essentially makes the search engine the gatekeeper of what users see, and Alphabet makes a lot of money by selling ads and preferential placement on its search results. Google Search's revenue represented $42.6 billion of Alphabet's $76 billion total revenue in the fourth quarter.
Chatbots could fundamentally change how search engines work; they are AI-trained models that understand language and pull information accordingly. The big difference is that a search engine will provide links based on your query, and a chatbot will provide an answer. It cuts out the need to sift through links; that could mean fewer ad opportunities for Alphabet, even if Google Bard keeps Bing from taking its market share.
It's not perfect technology; Bing and Bard have made mistakes when pulling from outdated information to answer a query. Nonetheless, investors should keep a close eye on how this technology develops. A chatbot that can update its knowledge pool in real time could be a genuine threat to the search engine as we know it.
Investors should look beyond advertising woes and ChatGPT
Will Healy: Admittedly, Google parent Alphabet may seem like the worst of the largest tech stocks. The ad business, which constituted 79% of the company's revenue in 2022, is in a downturn.
Worse, Microsoft's relationship with OpenAI has brought ChatGPT upgrades that have called Google's longtime dominance in search into question. Consequently, the sell-off in the stock has continued, and it has lost almost 40% of its value since peaking in October 2021.
However, Google still dominates search, and, more importantly, the company has prepared for such possible challenges for many years. It fostered new businesses through in-house innovation and acquisitions. These holdings include autonomous driving company Waymo, Verily Life Sciences, AI company DeepMind, and Google Cloud.
And despite its challenges, the overall revenue of $282 billion in 2022 grew by 10%. Google Advertising lagged that growth rate as it reported 7% growth for the year and a 4% revenue decline in the fourth quarter.
Fortunately, at least one of the aforementioned companies could be emerging at just the right time. Its most prominent non-advertising segment, Google Cloud, reported $26 billion in revenue in 2022, growing 36% year over year. This should bode well for the company as Google Cloud makes up an increasing share of revenue. It could also pave the way for other Alphabet-owned businesses to emerge in a similar manner.
Moreover, Alphabet is among the safest stocks in existence. It boasts $114 billion in liquidity and, even under more challenging conditions, generated $60 billion in free cash flow in 2022. Such reserves should help it survive downturns and fund more new business lines.
Additionally, investors can buy this free-cash-flow stream at a reasonable price. Its P/E ratio stands at 20, making it cheaper than mega-tech peers such as Apple and Microsoft.
Indeed, any credible threat to Google's search dominance should concern shareholders, and the downturn in advertising has shown that the company is not immune to the effects of the economy.
Still, none of those factors have stopped Google Cloud or upended the tech giant's ability to generate massive free cash flows. Hence, if you're looking for a large, safe tech stock that generates enormous amounts of cash, now is probably the time to consider Alphabet.
