Google Stock: Dominance Creates the Divide (NASDAQ: GOOG)

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The following segment is taken from this funding letter.


Google is one of the most extraordinary companies of the digital age. Its mission is “to organize the world’s information and make it universally accessible and useful.” It’s such a broad organizing principle for a business whose value is built on it. When you think of the massive adoption of the internet, smartphones, social and digital media, and e-commerce among billions users every day, and the exponential data growth that has resulted, we all know how valuable Google’s role in collecting, organizing, and filtering all of this information has become in our daily lives.

NVidia CEO Jensen Huang handled the challenge very well in an interview with technical analyst Ben Thompson recently:

“We know there’s a trillion things on the internet and the number of things on the internet is big and growing incredibly fast, and yet we have this little, tiny personal computer called a phone… how can we understand the billions things on the internet what we want to see on our tiny phone?

Well, there has to be a filter in between…essentially an AI, a recommendation system. A recommender based on the nature of the content, the characteristics of the content, the characteristics of the content, based on your implicit and your explicit [preferences]find a way to predict what you would like to see.

I mean, it’s a miracle! It’s truly a miracle to be able to do this at scale for everything from movies to books to music to news and video and so on.”

While Huang spoke more generally about the role of artificial intelligence amid the explosion of data, it’s hard not to think that Google best fits the role of the internet’s primary “recommendation system,” with its role de facto gateway to the Internet. In fact, it’s no coincidence that Google is a leader in artificial intelligence technology, which it applies to most of its services.

To effectively deliver high-performance and relevant information services, it is necessary to have a strong competence in artificial intelligence technology and Google goes far beyond the simple development of algorithms and software, as they develop chips specialized solutions that accelerate execution to build larger-scale IT systems comprised of entire data centers. Due to its success, Google enjoys a 90% share of all searches worldwide.

Execution of its mission is demonstrated by the value that Google delivers to billions of users around the world, not only through search, but also through other large-scale, easy-to-use information services that consumers and businesses find it particularly useful several times a day.

It has 9 services that each have over a billion users – Android, Chrome, Gmail, Google Drive, Google Maps, Google Search, the Google Play Store, YouTube, and Google Photos. It responds to billions of search queries per day (over 3 trillion searches per year!), streams billions of YouTube videos daily, and has more than half of the world’s population as consumers of its services.

Google makes life easier and better for its consumers, and for the most part “for free” – no one is forced to use Google’s services, but most people with an Internet connection can’t get by without it. pass. That’s how essential Google services are.

Its dominance is what creates its divide. In the news business, the breadth of data it can gather from its huge user base encapsulating their daily activities, needs and desires upon which it can develop and run sophisticated algorithms makes it difficult to competition for new and old businesses. Its data scale allows its algorithmic results to be better, and better results bring it more users and more data.

This, of course, leaves regulators who worry about a Google monopoly stuck in a bind – consumers and businesses choose to use Google’s services, bringing it network monopoly benefits and scale, but it offers huge benefits to its users, mostly for free. Traditionally, monopolies are considered “evil” because they can extract huge profits from their customers if they have no other options. But in Google’s case, it’s clear that the value it creates is mutually shared, and its customers always have other, albeit less effective, options. It has power, but there is little evidence that it has been abused over the past two decades.

Google monetizes the insights from all of this data by connecting millions of businesses with billions of consumers, creating tremendous value for both. Merchants compete on Google’s auction-style advertising platform to reach these consumers, with consumers having the ability to click on ads that interest them, driving the merchant’s ROI for those spends. In this way, hundreds of billions of value are created out of nothing (or more accurately, out of electrons)!

Google’s services platform has been so successful that its revenue has increased almost 7 times, from $38 billion to $257 billion over the past decade, with an incredible $75 billion added nothing than in 2021. Adjusted earnings jumped to $84 billion from $12 billion in the decade and nearly doubled in 2021 alone. Adjusted earnings exclude certain expenses such as business incubation expenses. businesses within parent company Alphabet, called “Other Bets,” to better reflect Google’s “core” profitability. The scale and speed of revenue growth in 2021 also demonstrated how inherently profitable Google’s core business can be – about half of every additional dollar in revenue fell on the operating profit line.

This rate of growth has been possible because Google reinvests tens of billions each year in R&D and Capex, and makes acquisitions to support these services and create new ones. Some of these acquisitions may take years of investment to bring to market and some would have been enviable standalone ventures, but Google’s platform can come to fruition with its years of patience, financial backing and scale, including its mine. of data and its talent pool.

While global behaviors around COVID have helped 2021 trends, we don’t expect there will be much reversal as we move forward, although growth will obviously slow from the 41% seen in 2021. Google’s services are essential for merchants and consumers. Just like with Mastercard mentioned earlier, nominal spending benefits from higher inflation rates. Given the strong link between consumer spending and merchant return on ad spend, we believe Google will continue to benefit from nominal GDP growth in the US and globally.

Additionally, growing businesses within Google, such as YouTube and Google Cloud Platform (GCP), have really found their footing over the past two years and have grown to a size that will see them contribute significantly to growth. future of the company. YouTube generated nearly $30 billion in 2021 and is expected to grow over 20% in 2022, while GCP has generated nearly $20 billion in revenue and is expected to grow over 30%. Interestingly, the challenges of Covid and inflation have increased the value of both offerings for customers, providing natural hedging.

More fledgling companies like Waymo, the self-driving car service Alphabet has been developing for years, are finally heading to commercialization with San Francisco as the second city launched after Phoenix. While Waymo’s value to Google might seem disconnected, it’s no exaggeration to see that self-driving cars would free up extra time for people to engage with Google properties while leveraging and contributing to its expertise in AI and its cloud infrastructure. Our team recently did a few Waymo rides in Phoenix and SHARE experience on Twitter.

We believe the future continues to be bright for the assets Google has built and its future opportunities remain very strong as IT and information services innovation continues to drive growing value globally. . Yet despite its long history of innovation and growth and the strong performance of stocks since 2019, up 100% versus 40% for the S&P 500, the valuation remains very reasonable as its earnings (including division losses Other Bets) more than doubled. from $48 in 2019 to $100 in 2021 and $125 estimated for 2022.

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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