Future Generation Virtual Investment Forum

Magellan: Alphabet

Company Alphabet
Sector Financials

Alphabet owns Google Search, YouTube, Android, Google Cloud Platform and five other global services where each have more than a billion monthly active users. Many of Alphabet’s businesses are dominant leaders in large global markets that should experience above-average growth for years to come. It also has several underappreciated opportunities.

Alphabet generated sales of US$162 billion in 2019, mostly attributable to Google’s success in capturing about 26% of global media advertising spending (ex-China) via Search, YouTube and its digital advertising technologies. Despite its market leadership, we expect Google to continue to take share of advertising from traditional media due to its superior targeting abilities and the high engagement of its services.

We think the market underappreciates several of Alphabet’s businesses that have considerable value and long growth runways, as they are most likely losing money at the moment. Google Cloud grew revenue by 53% to US$9 billion in 2019, and the business is likely to expand for many years as enterprises increasingly outsource their IT. Among the most promising of Alphabet’s ‘Other Bets’ is its self-driving car software, Waymo, that has the potential to lead the transformation of urban transportation.

Alphabet’s risks stem mostly from its success. Regulators have accused Google of anti-competitive abuses in search, digital advertising technology and Android. New privacy regulations and Apple’s policy changes could limit Google’s ability to collect data, reducing its ability to target ads. Over time, YouTube is likely to face tougher penalties for harmful content hosted on its platform. Governments are seeking to restrict Alphabet’s ability to shift revenue among subsidiaries to minimise its tax. It is spending billions every year on ‘Other Bets’, which are in industries typically distant from its core, and for which success is far from assured.

This information has been prepared and provided by Magellan. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.

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