I'm sure most people are familiar with Alphabet (GOOGL 0.66%) (GOOG 0.56%) in some capacity, as the dominant company has such wide reach when it comes to internet-based products and services. As one of the most valuable enterprises in the world, the stock has made for a great investment, rising 531% in the past decade.
But before rushing to buy shares, investors should learn more about the business. Here are three things the smartest investors know about this top tech corporation.
1. Financial position
Alphabet is no stranger to strong financial gains. Revenue and diluted earnings per share both increased at compound annual rates of 19% between 2012 and 2022. This helps explain why the stock has performed so well.
The company's ability to generate lots of free cash flow has resulted in a fortress balance sheet. As of June 30, Alphabet had $118 billion of cash, cash equivalents, and marketable securities compared to just $14 billion of long-term debt.
Besides the more well-known financial data points that I just discussed, investors should take a look at Alphabet's return on invested capital (ROIC). In 2022, Alphabet's ROIC was a stellar 22%. This not only means that executives should continue prioritizing allocating capital to growth opportunities, but it demonstrates how unique the company's business model is. Alphabet has reached a hugely profitable level of scale because most of its tech infrastructure is already built. Serving up another ad, playing a video on YouTube, or processing a Google Pay transaction has minimal marginal costs, which should lead to improved returns and margins over time.
2. Leader in AI
All the talk about ChatGPT has seemed to quiet down a bit, but that doesn't mean artificial intelligence (AI) is any less important, especially to companies in the internet sector.
Investors will be excited to know that Alphabet is already a leader when it comes to this new technology. CEO Sundar Pichai refocused the business to be "AI-first" in 2016, a year after he took over the top role for the Google segment. And it's easy to see that this vision has impacted the company.
Even before all the enthusiasm surrounding ChatGPT took over, Alphabet was using AI in its existing offerings. Providing updated traffic information in Google Maps and filtering spam in Gmail are examples.
At Alphabet's IO developer conference earlier this year, Pichai discussed newer ways AI could be applied to make the business better. One notable example is the Magic Editor, which can completely transform a photo.
With six products that each serve over 2 billion users, Alphabet is in a truly advantageous position because it already has a massive customer base to start pushing new innovations to. For younger AI start-ups, it's going to be an uphill battle to gain greater adoption, particularly when trying to compete with a dominant firm like Alphabet.
3. Search dominance
This is a leading internet enterprise, one that helped propel greater usage and users in the burgeoning digital world. As a result, Alphabet has some of the most popular services available.
Take YouTube. It's estimated to have 2.5 billion monthly active users, generating ad revenue of $29 billion in 2022. According to data from Nielsen, YouTube attracts more viewing time than streaming pioneer Netflix.
Google Cloud is the company's fast-growing cloud service provider, where revenue was up 28% year over year. Notable customers include household names like PayPal, Home Depot, and Etsy.
But investors can't forget that Search remains the company's crown jewel. Statcounter.com estimates that Google commands a whopping 92% of the global search market, even with ChatGPT being integrated with Microsoft's Bing search engine. Search revenue of $42.6 billion in the second quarter of 2023 represented 57% of the company's total. This means it will continue to be a major driver of business results.
