Image source: Alphabet.
The tech sector is usually considered quite risky and unstable; companies in this industry are exposed to a permanently changing landscape, and the winner of today can easily turn out to be the loser of tomorrow. However, Alphabet (GOOG 1.00%) (GOOGL 1.00%) is consolidating its rock-solid position as an undisputed industry leader, and this has important implications for investors in Alphabet stock going forward.
Alphabet rules the online world
Based on data for the fourth quarter of 2015, Alphabet's Google division is building an almost indestructible competitive position in the online world, as it owns seven different properties with over 1 billion monthly users each: Google Search, Android, Google Maps, Chrome, YouTube, Google Play, and Gmail. Google is one of the most valuable brands in the world, the name is so ubiquitous that "googling" for something is becoming a synonym for online searching, a privilege that only the most powerful brands can enjoy.
The bigger Google gets, the more information it has about its users, including data such as searching habits, personal interests, and geographic location, among others. This allows Google to provide superior search results and better targeted advertising, so a bigger Google also means a more valuable platform. This dynamic is building a self-sustaining cycle of user growth and increasing competitive strength, and it bodes well for long-term investors in Alphabet.
Alphabet and Apple (AAPL 1.68%) are direct competitors in different areas, particularly in mobile, where Apple's IOS and Alphabet's Android are the two leading operating systems for smartphones and tablets. In spite of this, Alphabet reportedly paid $1 billion to Apple in 2014 to secure Google's position as the default search engine in Apple devices. This reflects on how valuable Apple's ecosystem is from a strategic point of view, and it also shows how Alphabet is capitalizing on its enormous financial resources to continue building a massive empire in the tech industry.
Facebook (FB 1.09%) is gaining a lot of ground in online advertising, especially in the very important mobile segment. The social network has 1.59 billion monthly users as of the end of 2015, and nearly 1.44 billion users access Facebook via mobile devices on a monthly basis. Facebook's total revenue grew by an impressive 44% last quarter, and the company is now making nearly 80% of advertising revenue from mobile, so Facebook is not a competitor to overlook.
Chances are that Facebook and other industry players with a smaller revenue base will outgrow Alphabet in the coming years, as it's generally easier for a smaller business to grow at a faster rate. However, Google's leadership position in online advertising is cemented by rock-solid competitive strengths, and that's not going to change anytime soon.
On growth and soundness
The tech industry is fertile ground for growth, and Alphabet is no exception to the rule. Total revenue during the fourth quarter of 2015 was $21.3 billion, an increase of 18% versus the same quarter in 2014. Even better, sales in constant currency grew 24% year-over-year during the quarter, and this is nothing short of impressive coming from a company with a gargantuan revenue base of over $75 billion annually.
The Google segment produced $74.54 billion in sales during the full year 2015, while operating income was $23.42 billion. This means that profitability is remarkably high, as Google retains nearly 31% of revenue as operating profit.
On the other hand, Alphabet is losing a lot of money in its "other bets" division, a segment which includes highly innovative investments in areas such as healthcare, self-driving cars, high-speed Internet, and even outer space exploration. Sales in this segment amounted to only $448 million last quarter, but the operating loss in this division was a huge $3.57 billion. These projects are taking a big toll on profitability nowadays, but they could also mean explosive potential for growth in the future.
Alphabet is a fairly unique company in the tech world. The Google segment offers enormous competitive strength, and it provides big and dependable earnings for investors. The other bets segment is quite unpredictable, but these businesses could drive extraordinary growth over the coming years. When considering both soundness and growth potential, Alphabet is a world-class tech business to buy and hold for the long term -- perhaps even forever.
