Alphabet (GOOG 0.58%) (GOOGL 0.42%) has undoubtedly helped many of its early investors retire as millionaires.
The stock IPO'd at $85 in 2004, opened at $100, and closed its first day of trading at $100.34, so an ordinary investor could have easily bought the stock around $100 a share at the time of its debut. The company would later enact two stock splits, a nearly 2-to-1 split in March 2014 and a 20-to-1 split in July 2022. So if you bought what was then Google stock at $100 the first day it traded, you would have a split-adjusted cost basis of around $2.50 and a $20,000 investment would be worth close to $1.2 million today.
Alphabet may not generate the same eye-popping returns it did in its first 20 years as a public company, but it still can be a core holding that can help you retire a millionaire.
NASDAQ: GOOGL
Key Data Points
Not just a search giant
Not surprisingly, Alphabet is best known for its Google search engine. Google has become synonymous with search, leading to an estimated 90% global market share. Google is a cash cow for the company, with the search engine generating $175 billion in revenue in 2023, an increase of nearly 8% from 2022.
The solid revenue increase came despite 2023 being a relatively slow year for advertising growth as many advertisers were cautious with their ad budgets given uncertainties over the economy. However, search revenue often tends to be less economically sensitive compared to other types of advertising. The reason is that this type of advertising is performance-based and thus has a more measurable impact on sales.
However, search isn't Alphabet's fastest-growing segment -- that title belongs to its cloud business, which grew its 2023 revenue by 26% to $33.1 billion. Google Cloud is a business with a lot of fixed costs in terms of data centers and engineering, so scale matters. The segment just turned profitable in 2023, but it is now set to grow its profitability at a quicker pace than revenue given the operating leverage in the business.
Image source: Getty Images.
Alphabet's other big business is YouTube, which generated $31.5 billion in revenue in 2023, up 8%. Like Google, it also gets much of its revenue from advertising. However, the company's YouTube Premium and Music services just surpassed 100 million subscribers. Both services offer ad-free content and contributed about $15 billion of YouTube's revenue.
One of the strengths of the YouTube video platform is that it does not have the upfront content costs of other video services, instead opting for a revenue-sharing model with content creators. This has helped the company avoid many of the profitability issues that have plagued other streaming services. The company is also looking to compete with TikTok through YouTube Short videos by incentivizing creators to use the platform. Monetization of YouTube Shorts is still early, but represents a large potential opportunity given the platform's over 2 billion monthly users.
AI opportunity and an inexpensive stock
Given its dominant position in search and strong cloud and YouTube businesses, Alphabet is trading at an inexpensive valuation despite trading near an all-time high. It trades at a forward P/E of about 22.5 times and an enterprise value-to-EBITDA ratio of just 12.5 times. The latter metric takes into consideration the company's large net cash position of $97.7 billion and removes any non-cash items. This alone makes the stock a buy.
GOOGL PE Ratio (Forward) data by YCharts
However, the big reason to own Alphabet over the long term, and why it could help you retire a millionaire, is its underrated position in artificial intelligence (AI). The company is currently seeing the most beneficial impact from AI in its cloud service business, where it has credited AI for helping it win and expand deals last quarter.
However, there is some fear among investors that AI could disrupt Google's search dominance. So far there has been little indication of this happening. Traditional linked-based search results will likely continue to be the best way to serve users actively looking to buy a product or service. This represents only about 20% of searches done on Google, and it's the only time the company serves up ads. AI, meanwhile, could help the company profit from the 80% of searches for which it does not provide ads. For example, AI could provide Alphabet the opportunity to profit from questions answered using AI, either through brand advertising or a subscription service.
The landscape is evolving with AI, but companies will undoubtedly find new ways to profit from its uses and capabilities. Twenty years ago Google was only a search engine that IPO'd with a $23 billion market cap. Today, the company owns two non-search businesses that generate over $30 billion a year in revenue in Google Cloud Services and YouTube, along with its powerful search business. While it's difficult to predict where a stock will be in the next 20 years, Alphabet should be viewed as a core holding that can help power your portfolio.
