Many of the products and services Alphabet (GOOGL 0.37%) (GOOG 0.32%) offers users have become a staple in the everyday life of millions of people, most notably the Google search engine and YouTube. This isn't a new development either; these products have long dominated their niches.
This is an investment that's been hiding in plain sight for some, as almost everyone knew and used Alphabet's offerings even back in 2010. So what can investors learn from this? And how much would they have now if they had invested $1,000 in the company back then. Let's take a look.
Alphabet excelled in multiple ways to grow its business
If you had invested $1,000 in Alphabet (operating under the name Google back then) at the start of 2010, you'd have over $7,582 now. That's an impressive return for a relatively short time frame. For comparison, the S&P 500 would have turned $1,000 into $4,810 in that same period (when including dividend reinvestment).
So how did Alphabet have such a successful run?
Alphabet's main product is advertising. Its Google Search business is a cash cow. Just in Q1 of 2023, it generated $40.4 billion in revenue. This figure was up 2% year over year, which is impressive considering the weak advertising market. By establishing itself as the go-to place for advertising, Alphabet has created a foothold in a vital industry.
Additionally, Alphabet nurtured its acquisitions. In 2006, Alphabet purchased YouTube for $1.65 billion, which seemed unwise and too expensive to many at the time. But with time, Alphabet turned YouTube into another advertising powerhouse, generating $6.7 billion in ad revenue in the first quarter alone. Even though YouTube's ad revenue is slightly decreasing (the platform doesn't have the audience that Google Search does), it's still a significant contributor to its top line.
Alphabet also developed new capabilities in-house, like Google Cloud. With technology infrastructure switching to a cloud-based model, the tech giant knew it had to get into the game. While Amazon and Microsoft beat Alphabet to the punch with their product launches, Google Cloud is still a large part of the picture for the company and is rapidly growing, with revenue rising 28% year over year to $7.5 billion (more than YouTube) in Q1.
Artificial intelligence (AI) is Alphabet's latest foray, and its AI toolkit helps developers create their own models. Additionally, with Google Cloud, customers can access powerful computing systems that make training AI models a breeze. Although some may contend Alphabet has lost the first leg of the AI arms race, no other company has as many resources dedicated to the proliferation of AI technology. Due to its AI focus, Alphabet will likely be a massive winner in this space.
Through excelling in its main product, making smart acquisitions, and launching new offerings in-house, Alphabet has established itself as one of the premier tech companies. It also has considerable upside with its Google Cloud and AI offerings, so its best days may still be ahead.
But what can investors do with this information?
What other companies are hiding in plain sight?
Looking back, it's evident that Alphabet had a dominant product line. Knowing this now, what other businesses are dominating their niches and could make for solid investments? For me, companies like Airbnb and Tesla come to mind. Both are rapidly growing their offerings, and even though they have competition, their products are seen as revolutionary in their respective industries.
Creating a portfolio that is balanced between strongly executing established companies like Alphabet and fast-growing businesses like Airbnb and Tesla is critical, as the start-ups may not work out, or the legacy business may lose market share to a nimbler competitor (like how TikTok grabbed a chunk of YouTube's advertising share).
The key takeaway is to look at products you see growing in your everyday life and determine whether the stocks are worth investing in. If you can succeed in doing that, your investment returns will look impressive compared to the broader market.
