Alphabet (GOOGL 0.49%) (GOOG 0.66%) has been a wildly successful investment throughout its history. Since going public in 2004, shares have climbed a jaw-dropping 5,360%. This gain is astronomically higher than the return someone would've achieved by investing in the Nasdaq Composite index (up 681% over the same timeframe).
But past performance isn't necessarily an indicator of how a stock will do going forward. Here are two compelling reasons to consider buying this FAANG stock right now to take advantage of its future growth. If you already own the stock, there's also one reason you might want to consider selling.
Reason to buy: A deep and wide economic moat
Alphabet's dominant competitive position can largely be attributed to the deep economic moat its has built around its business. An economic moat is a term made popular by famed investor Warren Buffett that describes traits in a company's business model that help keep potential rivals at bay. For long-term investors, a deep moat is one of the most important characteristics found in successful stocks. That's because an economic moat raises the chances that a company remains competitive over many years.
Alphabet generates a competitive advantage through the network effect it operates in. Google Search, which generated 57% of the company's revenue operates a three-sided ecosystem involving internet users, content and website publishers, and advertisers. The system improves as the number of constituents in each group grows, building on itself in a virtuous cycle. Google Search also becomes more valuable for prospective stakeholders the larger it gets. Network effects have made this the single most dominant search engine in the world, with a 92% market share.
Alphabet also has a notable competitive advantage in data. The database it is developing can be applied across its various products and services, including YouTube, Workspace, Google Cloud, and Waymo. More users create more data which attracts more users in need of data. More users attracts more advertisers.
Reason to buy: Incredible financials
Alphabet's strong financials keep investors happy. Looking at the most recent income statement, Alphabet's gross margin is 56.7% and the operating margin is 28% and both metrics are enviably high among tech companies.
Many growth tech stocks tend to be unprofitable as they focus more on growth than profit, but clearly not Alphabet. It generated $78 billion of cumulative free cash flow in the past four quarters.
The balance sheet might be even more comforting. As of Sept. 30, Alphabet had just $13.8 billion of long-term debt. This is in comparison to $119.9 billion of cash, cash equivalents, and marketable securities on its balance sheet. It's safe to assume that this business will run into zero financial troubles should the economy enter a severe, prolonged recession. All that available cash also means Alphabet can continue investing in new initiatives, like artificial intelligence capabilities, to bolster its competitive positioning.
Reason to sell: Alphabet is already so big
Alphabet is a huge company with a market cap of $1.7 trillion and trailing-12-month revenue of $297 billion. That has some bears asking how much growth potential is left for this company. It's a valid concern. The larger a company gets, the harder it is to continue generating the same level of growth it did when smaller.
Alphabet's bulls will say that the law of large numbers by itself isn't a strong enough reason to want to avoid this stock. For what it's worth, Alphabet's revenue and diluted earnings per share increased at compound annual rates of 20.6% and 38.6%, respectively, between 2017 and 2022. For a company of this scale, those levels of gains are truly impressive.
With the internet continuing to expand in terms of number of users and usage, Alphabet is in a prime position to continue benefiting. Despite its large size, there is still some room for higher sales and larger earnings in the future.
