Stock story: Alphabet

A dominant business with significant growth opportunities. (Reading time: 2 mins)

Stock story: Alphabet

January 2022

Alphabet is best known for its ubiquitous online search service, Google Search, which commands more than 80% of the global search market outside China. The company also owns YouTube, the largest global online ad-supported video platform on which more than two billion users watch more than one billion hours of content per day. It owns Android, and the Play Store for developers to distribute Android apps, which collectively support over two billion devices globally.

Alphabet has five other online services with more than one billion users – Google Maps, Chrome, Gmail, Google Photos, and Google Drive. It also owns the Google Cloud Platform, the third-largest hyperscale cloud vendor globally after Amazon’s AWS and Microsoft’s Azure. Finally, the company’s ‘Other Bets’ segment houses a number of early-stage ‘moonshot’ projects; most notably, autonomous driving company, Waymo, which is arguably the technology leader in the nascent industry.

Of the more than US$250 billion in sales that Alphabet is expected to have generated in 2021, more than 80% is from advertising, and the majority of this is from Search advertising. Market dominance is a self-perpetuating pillar of the wide moat of the search business. Having the most users is a key competitive advantage as more users generate more revenue to cover the high fixed operating and capital costs, more users generate greater usage data to feed back into the service to improve it, more users drive advertisers to spend more time optimising their ads for your platform, and more direct traffic results in less revenue shared with distribution partners. In addition, Google is a highly customer-centric company, focused on improving the utility of the service, and ensuring that ad load does not hurt the user experience. Consequently, users generally like Google Search, and because it is free to use, it is difficult for new entrants to attract enough users to become viable.

Google Search’s share of the global advertising market is more than 20% and growing because it is able to deliver users with greater commercial intent than offline media, generating measurably higher returns for advertisers. The search business’s primary competitive risk is from the growth of vertical search competitors, Amazon in particular, but Google’s business is broader than e-commerce and has grown strongly despite Amazon’s steady rise. It also faces a risk from the rise of new computing interfaces such as digital assistants (e.g. Alexa). Alphabet has overcome the rise of new interfaces before. Apple is the prime example. Alphabet pays Apple well over US$10 billion p.a. for providing default search services on its devices (primarily the iPhone).

The greatest risk to Alphabet’s outlook is antitrust regulation. The company is facing dozens of lawsuits globally. It has been fined more than US$10 billion in total by the European Commission for antitrust abuses across Google Shopping, Android, and its online advertising tools. Notably, none of these cases, or the resultant behavioural changes, appear to have impeded the company. US governments have opened similar cases and US Congress appears focused on legislating on these issues though laws that restrict self-preferencing (e.g. not being able to preference Google Maps in Google Search results) could be damaging to Alphabet in its largest market.

From an environmental, social and corporate governance perspective, Google is exposed to privacy concerns as it collects and analyses the data generated by its users to better target advertising at them. However, Search is less exposed to reductions in targeting ability than YouTube, because of the critical importance of the search input text to show relevant ads. Separately, despite the high energy use of its global data centres, Alphabet has been carbon neutral since 2007 and intends to run entirely on renewable power by 2030.

Overall, Alphabet is a high-quality business that stands to benefit from the continued shift to digital life.

Sources: Company filings and website

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 (‘Magellan’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting 

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. 

Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.