Alphabet: Strong Moat & High ROCE Behemoth
- Rupam Deb
- Aug 29, 2022
- 7 min read
Updated: Dec 2, 2024
Charlie Munger said that he felt like a “horse's ass for not identifying Google better. I think Warren feels the same way.” Here's a deep dive into Alphabet's (NASDAQ: GOOGL) business.
Here at MoneyWiseSmart, we did a deep dive into Alphabet, and this full comprehensive report is part of our Multibagger Research Series.
The research report spans numerous pages and includes the following topics and more:
Business Overview and Competitive Advantages
Financial Summary and Operational Metrics
Management Team
Growth Prospects
Risks
Valuation
The full report is only available to our Multibagger Research Series subscribers, but we are releasing a free preview for everyone’s benefit as below. If you wish to subscribe to our Multibagger Research Series for the full report, do check out the details at the end of this blog post.
Part 1: Business Overview Alphabet
Introduction
Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) is a company that may not need much introduction, just like our previous MRS company coverage Meta Platforms (NASDAQ: META).
Alphabet, founded in 1998, has a mission to organise the world’s information and make it universally accessible and useful.
Nowadays, we can hardly live without Alphabet’s services – such as Google Maps, YouTube, and Chrome, just to name a few.
And not to mention the world’s most popular search engine, Google. It’s so popular that it has become a verb. You don’t search for something on the internet, but you “Google” for it.
Source: Oxford Advanced Learner’s Dictionary online
Fun fact: Every year, there are trillions of searches on Google, and 15% of the searches done daily are new.
Alphabet changed its name from Google Inc in 2015. Back then, Larry Page, one of the co-founders of Google together with Sergey Brin, explained what Alphabet is fundamentally about on his company’s website (emphases are ours):
“For Sergey and me this is a very exciting new chapter in the life of Google—the birth of Alphabet. We liked the name Alphabet because it means a collection of letters that represent language, one of humanity’s most important innovations, and is the core of how we index with Google search! We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for! I should add that we are not intending for this to be a big consumer brand with related products—the whole point is that Alphabet companies should have independence and develop their own brands.”
Essentially, Alphabet is a collection of businesses, the largest of which is Google.
Business Model
Alphabet reports Google in two segments – Google Services and Google Cloud.
It also reports all its non-Google businesses as Other Bets, which include technology outfits that are in the early stages of their business cycles.
Google Services
Google Services’ core products and platforms include ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube. Many of those services have over a billion users.
Google Services mainly makes money through its advertising solutions by delivering both performance and brand advertising that appear on Google Search & other properties, YouTube and Google Network partners’ properties.
Google Network is the collective name for all the web pages and apps where ads can appear when companies participate in AdMob, AdSense, and Google Ad Manager.
Performance advertising creates and delivers relevant ads that users click on, leading to direct engagement with advertisers.
Source: Google
Meanwhile, brand advertising helps to enhance users’ awareness of and affinity for advertisers’ products and services, through mediums such as videos and images that run across various devices.
Google is also looking to grow revenues beyond advertising to diversify its business. So there are non-ad revenues coming from Google Play, hardware, and YouTube non-advertising. Revenues from these arenas are collectively termed as “Google Other”.
Google Play generates revenues from sales of apps and in-app purchases, and digital content sold in the Google Play store.
Hardware generates revenues from sales of Fitbit wearable devices, Google Nest home products, Pixel phones, and other devices.
(Note: Alphabet acquired Fitbit for US$2.1 billion in January 2021.)
YouTube non-advertising generates revenues from YouTube Premium and YouTube TV subscriptions, and other services.
Google Cloud
Under the Google Cloud service, Alphabet provides enterprise-ready cloud services, including Google Cloud Platform and Google Workspace.
Google Cloud Platform enables developers to build, test, and deploy applications on its highly scalable and reliable cloud infrastructure.
Google Workspace tools — which include apps like Gmail, Docs, Drive, Calendar, Meet — are designed with real-time collaboration to help people work smarter together, something very relevant in a post-pandemic world.
The following comprise Google Cloud’s revenues:
Google Cloud Platform makes money through fees for infrastructure, platform, and other services.
Google Workspace, which includes fees for cloud-based collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar and Meet.
Alphabet’s cloud services are usually provided on either a consumption or subscription basis and may have contract terms longer than a year.
Other Bets
Alphabet takes a long-term view and manages the Other Bets portfolio companies with sustained discipline and rigour needed to deliver long-term returns. It is also extremely deliberate about its focus, scale, and pace of investments.
Revenues from Other Bets are generated mainly from selling health technology and internet services.
Below is a quick snapshot of Alphabet’s revenue streams from its fiscal year ended 31 December 2021 (FY2021) and FY2020:
Source: Alphabet FY2020 10-K (figures quoted in millions)
From the screenshot above, we can see that advertising makes up the bulk of Alphabet’s revenue. For FY2021, the tech giant made US$209.5 million in advertising revenue (or 81% of total revenues).
Non-advertising revenues come primarily from sales of apps and in-app purchases, digital content products, and hardware; and licensing and service fees, including fees received for Google Cloud services and subscription and other services.
In terms of geographical breakdown, most of Alphabet’s total revenue comes from the United States, followed by EMEA (Europe, the Middle East, and Africa), APAC (Asia Pacific), and Other Americas (consisting of Canada and Latin America).
Competitive Advantage
Premium content that includes details of Alphabet’s competitive advantages to fend off its competitors.
Part 2: Financials
Premium content that analyses Alphabet’s financial performances and operating metrics.
Part 3: Management Team
Management Team
Alphabet, which was known as Google then during its founding, was started by Larry Page and Sergey Brin in September 1998.
Page and Brin announced their resignation from their executive posts in December 2019, with Sundar Pichai (age 49), the CEO of Google, becoming the CEO of both Google and Alphabet. Page and Brin are still active Alphabet’s co-founders and controlling shareholders.
As of 5 April 2022, both of Alphabet’s co-founders owned around 6% of the company and had around 51% in total voting power based on its outstanding common stock.
Source: Alphabet 2022 proxy statement
In his letter found on Alphabet’s website, Larry Page explained how the co-founders run the overall organisation (emphases are ours):
“Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure each business is executing well. We’ll also make sure we have a great CEO for each business, and we’ll determine their compensation.”
He also sang praises of Pichai, saying:
“Sundar has been saying the things I would have said (and sometimes better!) for quite some time now, and I’ve been tremendously enjoying our work together. He has really stepped up since October of last year, when he took on product and engineering responsibility for our internet businesses. Sergey and I have been super excited about his progress and dedication to the company. And it is clear to us and our board that it is time for Sundar to be CEO of Google. I feel very fortunate to have someone as talented as he is to run the slightly slimmed down Google and this frees up time for me to continue to scale our aspirations. I have been spending quite a bit of time with Sundar, helping him and the company in any way I can, and I will of course continue to do that. Google itself is also making all sorts of new products, and I know Sundar will always be focused on innovation—continuing to stretch boundaries. I know he deeply cares that we can continue to make big strides on our core mission to organize the world’s information.
Those working in Google love Pichai as well, if the Glassdoor ratings are anything to go by. 92% of reviewers approve of the CEO, with Google as an organisation getting 4.5 out of 5 stars, with 90% recommending the company to a friend.
Source: Glassdoor
Other executives in the Alphabet management team worth highlighting are:
Ruth M. Porat (age 64), Chief Financial Officer (CFO)
Prabhakar Raghavan (61), Senior Vice President, Knowledge and Information, Google (responsible for Google Search, Assistant, Geo, Ads, Commerce, and Payments products)
Philipp Schindler (51), Senior Vice President, Chief Business Officer of Google (oversees Google’s and YouTube’s sales activities, among others)
Compensation Structure
Source: Alphabet 2022 proxy statement
In 2021, the named executive officers (as shown in the table above) collectively received around US$93 million in total compensation, and this translates into just 0.04% of Alphabet’s 2021 revenue (or 0.1% of net profit for the year).
Page and Brin are receiving just US$1 as direct compensation.
Source: Alphabet 2022 proxy statement
Part 4: Growth
Premium content that looks at Alphabet’s growth prospects.
Part 5: Risks and Valuation
Risks
Premium content that discusses Alphabet’s risks.
Valuation
Premium content that analyses Alphabet’s valuation.
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