Long-term investors should "google" Alphabet (GOOGL), jests Ingrid Hendershot, a value-oriented money manager and editor of Hendershot Investments.
The very first web page was created in 1990 and by late 1992, there were a mere 26 websites in the world. However, just a few years later, web pages numbered in the tens of millions and searching for information became challenging.
To address that challenge, Stanford University graduate students, Larry Page and Sergey Brin, built a search engine from their dorm room that used links to determine the importance of individual web pages.
By 1998, they formalized their work and named their search engine Google, a play on the word, googol, which is the mathematical expression for a 1 followed by 100 zeroes. The name reflects the immense volume of information that exists and Google’s mission to organize the world’s information and make it universally accessible and useful.
Google’s strong global brand is one of the most recognized in the world as millions of people use Google’s services every day. Search results are no longer just web pages. They include images, videos, books, maps and more.
In 2006, Google acquired YouTube, which lets billions of people watch and share original videos and professional content. With searches increasingly coming from mobile devices such as smartphones, Google developed Android, a mobile operating system that allows open interoperation across carriers.
To enable faster searches, Google launched a web browser called Google Chrome which makes it easier for folks to use their favorite Google products like Google Maps, Gmail, Google Photos, Google Play, Google Docs and Google Translate.
Google's core products such as Search, Android, Maps, Chrome, YouTube, Google Play and Gmail each have over one billion monthly active users. In August 2015, Google created a new public holding company called Alphabet. Alphabet is a collection of businesses, the largest of which is Google. Google consists of the previously described Google Services and Google Cloud.
Google was a company built in the cloud and the company continues to invest in infrastructure, security, data management, analytics and artificial intelligence. Alphabet also includes businesses known as the Other Bets which are currently unprofitable but making important strides in their various industries such as driverless cars, healthcare and other innovative ventures.
Most of Google’s products and services are free for users. The majority of the company’s $258 billion in revenue in 2021 came from advertising as Google’s proprietary technology matches ads to the content of the pages on which they appear.
Advertisers pay the company either when a user clicks on one of its ads or based on the number of times their ads appear on the Google Network. Thanks to the growth of the digital economy, Google has provided outstanding growth with revenues and earnings more than doubling over the last five years.
Alphabet reported fourth quarter revenues clicked ahead 32% to $75.3 billion with net income up 37% to $20.6 billion and EPS up 38% to $30.69. Google advertising revenues increased 33% to $61.2 billion, propelled by a 36% increase in Google Search to $43.3 billion, a 25% increase in YouTube ads to $8.6 billion and a 26% increase in Google Network to $9.3 billion.
Google Cloud revenue increased 45% to $5.5 billion and generated an $890 million loss as the company continues to invest heavily in people and its cloud infrastructure. For the 2021 year, Alphabet reported revenues of $257.6 billion, up 41% from 2020, with net income of $76.0 billion, up 89%, and EPS of $112.20, up 91%.
During 2021, Alphabet generated operating cash flow of $91.7 billion and free cash flow of $67.0 billion with the company returning $50 billion to shareholders through share repurchases. Alphabet ended the quarter with nearly $140 billion in cash, $14.8 billion in long-term debt and $251.6 billion in shareholders’ equity on its pristine balance sheet.
The company announced a 20 for 1 stock split; the shares are expected to be distributed on July 15, 2022. Overall, this is a high quality company with a strong global brand, outstanding growth and robust cash flows. We rate the stock a buy.
