After reaching an all-time high price of $149.84 in 2021 (taking into account the company's 20-for-1 stock split a year ago), Alphabet's (GOOG 1.75%) (GOOGL 1.68%) stock has fallen by about 27%.
The lower share price piqued my interest in the company, and upon researching more, I discovered numerous reasons to like Alphabet -- so much so that I've decided to keep the stock on my long-term watch list.
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Alphabet has a dominant digital advertising business
Alphabet has become an integral part of our daily lives, offering access to a range of products, including Gmail, Google Drive, YouTube, Google Maps, and more. But despite the various services, the company still relies predominantly on its advertising business -- mainly search engine -- for the lion's share of its revenue.
Thanks to its smart search algorithm, Google's search engine is extremely popular among users because it gives users the most relevant search outcomes. So the better the company delivers relevant search outcomes, the more people use it. And as more people use the service, the quality of the search results improves even more, thanks to network effects. So over time, Google's search engine has become the most dominant search engine, accounting for more than 90% of global search in 2023.
As the most popular search engine in the world, Google gets to collect massive amounts of user data. This allows it to understand what users are looking for and what they might be interested in, allowing it to provide targeted ads to businesses. Targeted ads are more effective than nontargeted ads because they display the ads to people more likely to be interested in the advertised product or service, resulting in a higher conversion rate and return on investment for the advertiser.
And as advertisers achieve impressive advertising outcomes through the Alphabet platform, the company's financial performance soars. Over the last decade, revenue has increased more than four times, from $60 billion in 2013 to $283 billion in 2022. Similarly, net profit has improved substantially, rising from $13 billion to $60 billion.
Still, despite Google's dominance, there are increasing concerns that ChatGPT (and its partnership with Microsoft) could derail the former's monopoly position in search. While the risk is there, it is still too early to call a winner. After all, Google introduced its PaLM 2 language model that powers the company's conversational AI (Bard), which together with its trove of data collected over the years, will further enhance the capabilities of its search engine. It is definitely an area to watch out, though.
The elephant can still dance
Although a company's growth prospects usually decline as it becomes larger, despite its enormous size, Alphabet still has ample opportunity for further expansion.
One of Alphabet's most promising areas for growth is Google Cloud, which is benefiting from the ongoing trend of businesses migrating to the cloud. Although Google Cloud currently has a 10% market share, making it the third-largest cloud provider behind Amazon and Microsoft, its market share has steadily grown.
In other words, Alphabet has the potential to ride the market tailwind and gain further market share. In the first quarter of 2023, Google Cloud's revenue grew by 28%, significantly outpacing the company's overall revenue growth, which was only 3%.
YouTube is another area of significant interest for Alphabet. With over 2.6 billion users globally, the video-sharing platform has tremendous potential, as more people (especially the younger generation) prefer to consume content in video format.
To attract and retain users, YouTube has been testing various features, including the more recent short videos. By experimenting with these new features, the platform hopes to increase user engagement over time, which will help its monetization efforts. These efforts probably explain the consistent growth in user base over the last decade, reaching a high of 2.6 billion users in 2022. More importantly, some of these new features -- like short video -- is necessary to mitigate the impact caused by Tiktok.
Besides these obvious growth areas, Alphabet has invested in moonshot ventures, including Waymo driverless cars, artificial intelligence, life sciences, etc. If successful, some of these projects could open up new sources of growth for the tech conglomerate.
Why investors should keep Alphabet on their watch list
Thanks to its smart search algorithm and targeted ad capabilities, Alphabet is the clear leader in the digital advertising industry.
However, the company's potential for further growth extends beyond advertising, with promising areas such as Google Cloud and YouTube. Additionally, Alphabet's investments in moonshot ventures could open up new growth sources.
As Alphabet continues to innovate and expand, it will be interesting to see how the tech conglomerate shapes the future of technology and the digital economy.
All that said, I'm adding the stock to my radar.
