Strangely, Alphabet (NASDAQ: GOOGL) is one of the most misunderstood companies on Earth. In fact, many journalists get even the company’s name wrong.
Management calls the company Alphabet Inc. (NASDAQ: GOOG), not Google. Instead, Alphabet is a holding company that owns many businesses and platform. The search engine Google is the oldest, largest, and best known of those businesses.
Prominent Alphabet businesses include; Google, YouTube, Android, Nest Labs, SideWalk, Calisco, X, Doubleclick, Google Fiber, Google Maps, AdSense, Alphabet Capital, Waymo, Verily, Jigzaw, Deepmind, Alphabet Hardware, Alphabet Access & Energy, and Alphabet Infrastructure. However, these organizations are just the tip of the iceberg.
Alphabet Owns over 200 Companies
In fact, Alphabet owns over 200 companies, Investopedia, estimates. Many of those companies originate at X; Alphabet’s Research & Development arm. To clarify, X is a combination incubator and think tank Alphabet runs.
Consequently, many Alphabet subsidiaries operate in unprofitable cutting edge businesses. For instance, Waymo is developing self-driving vehicles, DeepMind creates artificial intelligence, Nest Labs works on the Internet of Things (IoT), and Verily Life Sciences is dabbling in healthcare and medicine.
Why Alphabet is Like Berkshire Hathaway
Under these circumstances, Alphabet has more in common with Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) than a traditional tech company. Like Berkshire Hathaway (NYSE: BRK.B) Alphabet owns many subsidiaries, decentralizes management, and makes a lot of money.
In another similarity, Alphabet operates in many seemingly unconnected businesses. Alphabet is in transportation through Waymo, entertainment through YouTube, fiber optics through Google Fiber, Healthcare through Verily, and home appliances through Nest Labs, for example.
Meanwhile, Berkshire Hathaway owns furniture stores, pipelines, newspapers, trucking companies, insurance companies, auto dealers, realtors, power plants, an underwear maker, and even a brick maker. However, most of those companies make money.
The huge number of subsidiaries creates diversification which offers protection from loss. For instance, if Google Fiber loses money, YouTube; or AdSense. revenue could cover the losses.
Is Alphabet the New Berkshire Hathaway?
dditionally, if Waymo loses money on its vehicle R&D, DeepMind could cover the losses by making money with artificial intelligence and machine learning. Meanwhile, decentralization limits administration costs, and contains risks by keeping businesses separate.
Finally, both Berkshire and Alphabet do a lot of number crunching. Buffett carefully examines financial reports before purchasing stocks. Notably, Uncle Warren famously spends most of his workday reading financial numbers. Significantly, Alphabet’s old name Google, comes from the number Googol (one followed by 100 zeros).
In another similarly to the Berkshire empire, Alphabet buys or starts companies with lots of growth and revenue potential. Notably, YouTube is now the world’s biggest TV network.
YouTube is America’s Biggest TV Network
YouTube for instance, is America’s most popular “TV network” with 192 million viewers in 2018, Statista estimates. In addition, Statista estimates YouTube’s American viewer base could grow to 210 million by 2022.
In fact, Statista estimates 68% of Americans listened to music on YouTube in February 2017. Meanwhile, 82% of YouTube users listen to music on the platform in 2016. Plus, 32% of American gamers watched games on YouTube in 2016.
Incredibly, Business of Apps estimates 73% of US adults use YouTube and two billion people worldwide use YouTube each month. Plus, they installed YouTube on five billion Android devices in December 2018. Moreover, people upload 500 hours of content to YouTube each day and people watch 250 million hours of YouTube videos on TV screens each day.
YouTube is Bigger than You Think
YouTube Kids, for instance, has eight million viewers who registered 30 billion views in 2018, Business of Apps calculates. Meanwhile, YouTube streamed an average of 4,405 games a day in January 2019.
Impressively, the Top 10 YouTube Channels generated $180.5 billion in revenues between June 2017 and 2018, Business of Apps claims. Additionally, people watched 50 billion hours of YouTube gaming content in 2018.
YouTube is so lucrative it is hard to ascertain how much money it makes. However, Business of Apps claims YouTube generated $3.36 billion to $4.443 billion in advertising revenue in United States in 2019. However, Business of Apps estimates YouTube’s total 2018 ad revenues at $9.5 billion to $14 billion.
Alphabet is a Great Investment in Social Media
Notably, YouTube is the only American social media capable of seriously competing with Facebook. Statista estimates that YouTube was the world’s second most popular social media with two billion users in June 2019.
Furthermore, YouTube was the only non-Facebook product in the top four social medias worldwide in June 2019. Statista calculates those media were Facebook; 2.375 billion users, YouTube; two billion users, WhatsApp; 1.6 billion users, and Facebook Messenger; 1.3 billion users.\
Under these circumstances, Alphabet is a great investment in social media for those who hate Facebook. Currently, Alphabet is the only company capable of competing with Mark Zuckerberg’s empire worldwide.
How Much Money is Alphabet Making?
YouTube proves Alphabet can build incredible platforms but how much money does the company make? Stockrow’s answer to that question is a lot.
For example, Alphabet reported a quarterly gross profit of $21.648 billion on revenues of $38.944 billion on 30 June 2019. Astoundingly, Alphabet reported a revenue growth rate of 19.25% for the quarter ending on June 30, 2019.
Those numbers led to an operating income of $9.18 billion on 30 June 2019, up from $6.608 billion on March 31, 2019. In addition, Alphabet reported a net income of $9.947 billion on June 30, 2019, up from $6.657 billion on 31 March 2019.
Predictably, Alphabet is bringing in a lot of cash. There was an operating cash flow of $12.627 billion and a free cash flow of $6.647 billion on 30 June 2019. The operating cash flow grew from $12 billion to $12.627 billion in the last quarter. However, the free cash flow fell from $7.396 billion to $6.467 billion in the same period.
How Much Money does Alphabet Have?
Alphabet is now one of the most cash rich companies in the world. Astoundingly, Alphabet reported $121.056 billion in cash and short-term investments on 30 June 2019. That number grew from $113.488 billion on March 31, 2019.
In detail, Alphabet had $16.587 billion in cash and equivalents and $104.469 billion short-term investments on 30 June 2019. In comparison, Berkshire Hathaway had $44.634 billion in cash and short-term investments on 30 June 2019.
I think the cash justifies investors’ faith in Alphabet. In addition, I believe the $1,1624.25 stock price Mr. Market gave gave the former Google on 14 August 2019 is undervalued.The price is low because Alphabet shows it can identify cash-rich businesses and monetize them.
Therefore, Alphabet (NASDAQ: GOOG) is a great growth stock and an excellent long-term investment. However, Alphabet is a questionable income stock, because like Berkshire Hathaway famously pays no dividend.
Alphabet’s Growth Will Continue
In the final analysis, Alphabet’s prospects for future growth are tremendous. I think several of Alphabet’s subsidiaries could grow as big and as influential as YouTube.
The autonomous vehicle company Waymo, in particular, could tap a massive. To elaborate, Statista estimates there were 272.48 million registered vehicles in 2017. If 25% of American vehicles use Waymo’s operating system for self-driving vehicles, Waymo could have 68.12 million “users” in the United States alone.
Pointedly, Waymo is working with major automakers including Fiat Chrysler (NYSE: FCAU), Nissan-Renault (PA: RNO), and Tata Motors (NYSE: TTM). Nissan-Renault will introduce Waymo’s autonomous vehicle technology to France and Japan, for example, The Verge claims.
Additionally, Waymo is developing Waymo One, a ridesharing service that could compete with Uber (NASDAQ: UBER) and Lyft (NYSE: LYFT). Impressively, 95 million people worldwide used Uber, the best known ridesharing app in 2018, Statista estimates. Plus Statista estimates Uber generated revenues of $11.3 billion in 2019.
Alphabet is the Ultimate Widows and Orphans Stock for the 21st Century
Thus, Alphabet is a money-making machine that will continue to grow and grow and make more money.
Those seeking security need Alphabet because GOOGL and GOOG could be the best “widows and orphans stocks” for the 21st Century. To explain, a widows and orphans stock is an equity so safe investment advisers recommend it for people with no other source of income.
Interestingly, I think Alphabet meets the widows and orphans criteria in today’s market, and will keep that status for a long time. In particular, I think Alphabet is safe because of its management’s willingness to diversify and protect the company by investing in research and development.
Originally published at https://marketmadhouse.com on August 13, 2019.