Among US high-flying technology stocks, it’s becoming tough to pick a right name for your buy-and-hold portfolio after the powerful rally of the past decade. In this uncertain environment, we have two major reasons why Google (NASDAQ:GOOG) might just be the ideal choice.
Investors are confused as to which of the tech titans from the FANG group will successfully transition into the next phase of the technology boom, in which smart homes, driverless cars, and artificial intelligence will create new opportunities for wealth.
The intense scrutiny that tech companies face these days also has investors concerned about future growth potential.
Facebook Inc. (NASDAQ:FB) shares, for example, have lost quarter of their value since late July. This is a direct result of concerns that the social media giant won’t be able to sustain its earnings momentum as it deals with data privacy issues and the threat of new legislation to increase oversight.
Despite the uncertain environment for FANG stocks, there are a couple of names which have largely been unaffected by the negative sentiment. Google's parent Alphabet (NASDAQ:GOOG) is one of them. Here are two top reasons why we believe Google will withstand the selling pressure that is hurting other technology stocks and therefore justifies its long-term bull case.
1. Strong Moat
The single wealth-building trait to look for in every stock you’re considering to buy is its economic moat, a term coined by the world’s most successful value investor, Warren Buffett.
In his 2007 letter to shareholders, Buffett explains this concept:
“A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns…. Therefore a formidable barrier such as a company’s being the low-cost producer or possessing a powerful world-wide brand is essential for sustained success.”
Google is definitely a company with a strong moat that is almost impossible to challenge. More than 90% of all internet searches take place through Google and its company subsidiary YouTube. Everyday, Google processes 3.5 billion searches that make its platform the most valuable for advertisers.
That means companies have little choice but to advertise on Google's platform. If your products and services don’t appear in a web search, people won't be able to find you. Because of its huge internet presence, Google dominates the digital advertising market with a 40% control of the market globally.
The latest evidence of this unparalleled superiority came in the second-quarter earnings report when the company posted 24% growth in its advertising business that pushed total Alphabet revenue to $26.24 billion.
This massive growth came despite a regulatory backlash in Europe as well as mounting questions over Google’s massive data collection and clashes with advertisers over inappropriate content on YouTube.
2. Massive Firepower
Investing in a wide-moat business is no guarantee that a stock will be a winner. If a technology company isn’t constantly innovating, nor investing in new growth areas, there is a good possibility that it will be left behind.
Luckily, Google, with its strong financial muscles, is at the forefront of new technology innovations that will fuel future revenue growth. In particular, self-driving car technology presents the greatest opportunity of all for Alphabet.
According to UBS, the self-driving car market will touch $2.8 trillion by 2030, and Alphabet venture, Waymo, has the potential to capture the 30% share in this market.
Home automation, cloud computing, and artificial intelligence are other areas where Alphabet is spending aggressively to become the market leader. While speaking with analysts at a recent earnings calls, Alphabet's chief financial officer Ruth Porat made it clear that the company will continue to spend on the new growth areas in order to remain a leader. Porat said in April:
"The opportunity set ahead of us is quite extraordinary, and we remain focused on investment to support long-term revenue and profit growth."
“We have both the business confidence to invest appropriately in the next phase of innovation as well as clarity about some very compelling opportunities.”
Bottom Line
Google is investing heavily to maintain, or even exceed its 20% growth in EPS each year. That means that with a forward price-to-earnings multiple of 24, Google stock doesn’t look expensive at all.
While Google’s traditional growth drivers remain unchallenged and the company positions itself to grab a major share of new growth areas, it’s a no-brainer to stick with your Alphabet holdings.