The Alphabet Opportunity: Navigating Risks and Rewards

Few companies have become as central to our daily lives as Alphabet, the parent company of Google.

Founded in 1998 by two Stanford Ph.D. students, Larry Page and Sergey Brin, Google began as a simple search engine. Their goal was to organize the world's information, and they did it so well that "Googling" quickly became a verb. Over the years, Google transformed from a search engine into one of the most dominant companies in the world with a market cap over $1 trillion

Alphabet's dominance is built on powerful network effects combined with high barriers to entry.

But maybe Alphabet’s dominance is starting to crack.

The Department of Justice is pursuing an antitrust lawsuit against Alphabet, challenging its search distribution practices and exclusive deals. For the first time in decades, Google Search faces genuine competition. AI-powered search engines have gained traction, showing early promise in rivaling Alphabet's search dominance.

These developments create uncertainty, and while markets typically dislike uncertainty, it can also present a compelling investment opportunity if fears prove exaggerated.

Given Alphabet's robust portfolio of businesses, this short-term uncertainty may be creating an attractive investment prospect.

Quality Factors

Alphabet boasts a diverse portfolio of businesses, with its strongest competitive advantages lying in search, video streaming, cloud computing, and mobile operating systems. These advantages stem from a powerful combination of network effects, high barriers to entry, and significant switching costs. Rather than dissecting each factor individually, we'll examine each business division and the quality factors that define them.

Google Search

Barriers to Entry

Google Search has some of the strongest barriers to entry in the tech industry. Google processes over 8.5 billion searches daily, and this enormous scale gives it a data advantage that’s nearly impossible for competitors to match. With this vast amount of data, Google continuously refines its search algorithms, improving the relevance and accuracy of its results.

Another significant barrier is the enormous cost of building and maintaining the infrastructure for a global search engine. A new competitor would likely need to invest hundreds of billions of dollars to match Google Search's scale and scope. Few companies possess the financial resources to even contemplate competing with Google.

Additionally, Google’s partnerships with web browsers like Mozilla’s Firefox, device manufacturers like Apple and Samsung, and its owner browser Chrome give it an entrenched position as the default search engine for billions of users worldwide. This further raises the difficulty for new entrants to gain market share.

As of January of this year, Google Search’s worldwide market share was 92.5% and since 2015 Google’s market share has held steady between 91 to 92.5%.