1. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holdings: 191
YTD Decline (As of November 9): 35.58%
Based in Mountain View, California, Alphabet Inc. (NASDAQ:GOOG) is an American multinational technology conglomerate holding company which parents Google and several other Google subsidiaries. The stock’s discounted valuation sheds light upon the fact that the market is ignoring the considerable increase in subscription rates of the company’s YouTube Premium services, despite the declining macroeconomic climate. Furthermore, the company’s introduction of Pixel Pass and increased compatibility with YouTube Premium services will pave the way to a Google ecosystem, with skyrocketing subscription rates acting as leverage to attain e-commerce goals.
On October 26, Deutsche Bank analyst Benjamin Black lowered the price target on Alphabet Inc. (NASDAQ:GOOG) to $120 from $130, keeping a Buy rating on the shares. Although the company’s Q3 returns did not meet Wall Street expectations, the analyst contends that the stock is still best-positioned compared to other players in the market. Black expects solid long-term advertising revenue growth driven by Search and YouTube, strong Google Cloud momentum, and option value in other areas. Although the advertisement business suffers due to macroeconomic uncertainties, Google Cloud has shown it is more than capable of covering the advertisement deceleration as it outperforms peers. Furthermore, Alphabet Inc. (NASDAQ:GOOG) has entered into a hiring freeze which will further aid in maximizing operational efficiency.
Here is what Mayar Capital had to say about Alphabet Inc. (NASDAQ:GOOG) in their Q3 2022 investor letter:
“In early January this year – which admittedly feels like eons ago – US President Joe Biden was pushing Americans to take up the government’s offer of free COVID tests to help tackle the surging omicron variant. How did Biden respond when citizens asked about the availability of these tests?
“Google it!”
This advice, undoubtedly well-meant, was roundly scoffed at by the press, however. It seemed too obvious to be very helpful.
Anyway, the anecdote serves to introduce you to one of our largest holdings, Alphabet; the parent company of Google. Note that first, Alphabet’s original and core product – its search engine – has entered our common vocabulary as a verb. ‘Googling’ something has the same meaning as ‘researching’ or ‘finding an answer to’ something. Second the reason Biden’s advice was met with such opprobrium was because Googling something has become almost second nature to us now.
These two observations reveal a lot about Google’s strength in the search engine market, in which it has a share of over 90 percent. Because internet search is almost the prototypical network, Google has benefitted from – and we think is also protected by – the huge competitive advantage its scale brings – both to those asking the questions and those providing the answers. The Google search platform becomes increasingly useful to anyone seeking information as a greater volume of stuff becomes available. This starts a virtuous cycle that results in a colossal market share for Google itself. In the language of business strategists, Google benefits from vast network effects.
Because Google’s search results are viewed by billions of eyeballs every day, its search page ‘real estate’ is understandably very valuable to those with goods and services to sell. Advertising revenues from this ‘real estate’ as well as that from its other properties such as Mail, Maps, and so on, totaled almost USD 150b in 2021; amounting to almost 58% of the company’s revenues. Ad sales on YouTube, also owned by Alphabet, brought in another USD 28b. With the secular shift of the advertising spend to digital channels – over which Alphabet has a tight grip – we estimate the company has a share of around 40% of the digital advertising market and is probably the most valuable advertising property in the world…” (Click here to see the full text)
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