For many investors, stock investing has become a necessity to help keep up with the effects of inflation.
Yet, buying stock is a complex decision, as investors need to consider a wide range of factors before investing in any stock. This endeavor is daunting for many, especially for those new to the financial world.
Still, investors can start buying small amounts of stocks and improve their knowledge over time. The caveat is that they should stick to well-proven, stable companies and hold them over a long time.
Alphabet (GOOGL +1.31%) (GOOG +1.09%) is an excellent example of that kind of company.
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Alphabet owns an economic franchise
The Oracle of Omaha, Warren Buffett, explained in a 1991 letter how to find a good business, which he referred to as a franchise.
An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute, and (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital.
While no else is Buffett -- and probably will never be as good an investor as he is -- even new investors can strive to follow his framework when looking for an investment. Alphabet's advertising business seems to fit perfectly into the framework.
People use Alphabet's services daily, including Google Search, YouTube, and others. Some of them, such as Google Search, have near monopoly positions in their niche. For instance, Google Search has more than 90% market share, making it almost indispensable. Beyond Google Search, other services such as Android, Chrome, etc., in some way or another, feed data directly into Alphabet's advertising machine. With this vast database, Google can provide cost-effective targeted ads to advertisers.
Google's success lies in its ability to process a massive amount of data with its algorithms. As a result, users get the most relevant search outcomes, while advertisers get the opportunities for effectively targeted ads.
For consumers, there's almost no alternative to Google Search. Similarly, advertisers can hardly move beyond Google and Meta Platforms for digital advertising since the duo controls more than half of the global digital advertising market share.
A needed product with little alternative and no price regulation -- I think Google's advertising business fits that description. It's no wonder Alphabet has sustainably grown its revenue over the last decade.
NASDAQ: GOOGL
Key Data Points
Alphabet is well positioned for future expansion
Alphabet's success puts it in the league of some of the world's biggest companies. But despite its gigantic size, it still has room for further growth.
As a start, Alphabet can continue to grow its advertising business, leveraging its platforms like Google Search, YouTube, Android, and others. As long as the company can keep its products sticky to users, it will be in an excellent position to grow its advertising business. For example, YouTube's newer features, like short videos, could improve user engagement, opening up potential new advertising income streams for Alphabet.
Besides advertising, Google Cloud is another promising growth area as it rides on tailwinds like cloud migration and artificial intelligence (AI) growth. These trends almost guarantee that cloud usage will grow for years, if not decades. In particular, the advancement of AI means that companies will move from basic cloud storage to more advanced computing services, such as machine learning, generative AI, etc.
And let's not forget about Alphabet's moonshot bets across various industries, such as driverless cars (Waymo), Verily in life sciences, Loon in balloon-powered internet, and more. While not all of these investments will be successful, some will be, which may open up entirely new revenue sources for Alphabet.
What it means for investors
Alphabet has a solid track record of growing its business over long periods. And the company's future looks equally bright as it rides on multiyear tailwinds like migration to the cloud and AI.
As such, the stock deserves a place on investors' radar or, for some, in their portfolio. In particular, those who have just begun their investing journey can consider buying a small position in the company. They can add to that position when their conviction grows or if Alphabet executes.
Investors should start on solid footing, and Alphabet stock may just be what they need.
