Do You Understand Google Stock?
Although we use Alphabet Inc’s (Google) (NASDAQ:GOOG) products on a daily basis, most investors probably can’t tell you why Google stock is worth so much. Worse still, they probably can’t give you an accurate description of how Google stock makes money.
Some of the clever ones might say that Google makes money by selling ads, but such a simple description doesn’t help us know whether GOOG stock is worth owning.
Imagine you’re shopping for a car. You ask around for advice, and yet all you hear is “cars run on gasoline.” It wouldn’t be enough for an informed decision, would it?
There are other questions to be answered. Does it have the right kind of engine? Is it going to need repairs on a regular basis and, if so, how much do parts and labor cost on average?
Investing is much the same. Getting rich on the stock market isn’t easy, otherwise everyone would do it. You need to understand the moving parts of a business, how they fit together, and why they could translate to a higher stock price.
I’ve already applied this process to Google stock. What I found turned me incredibly bullish on the stock, but don’t take my word for it. Do your own homework and see if it matches up with my results. Here’s where I think GOOG stock is headed.
Google Stock is Designed for Growth
Twelve years ago, a new company was added to the NASDAQ stock exchange. At the time, Google stock was trading at $85.00 per share. Taking into account the two-for-one stock split, an early investor could have made 1,780% on this one investment.
It’s not luck; it’s not coincidence. Google stock is a unique play, because it is specifically designed for continual growth. Think about the early success of Google search.
Other search engines existed at the time, but Google absorbed their market share by building a more sophisticated search algorithm. Within a few years, the company had a natural monopoly over the Internet search market, meaning it earned that dominance through a superior product. No tricks, bullying, or cronyism.
Put another way, GOOG stock was built on quality.
Then came “Gmail,” another product so good that it eclipsed most other e-mail services (although “Outlook” still has a good chunk of the enterprise market). Aside from Gmail, there was “Google Maps;” the product that destroyed “MapQuest” and GPS devices.
“Android OS,” “Google Docs,” and “Chromebooks.” Time and time again, Google stock has provided an incredible product which customers find irresistible. Believe it or not, this ends up being a winning strategy for both the company and its shareholders.
Once customers are locked into the Google ecosystem, advertisers line up for a chance to hawk their wares. They need to reach customers, and Google is the only road in town. So they pay the toll to keep driving customers’ attention to their products.
This is what people mean about “Google making money by selling ads.” It’s true, strictly speaking, but there’s a lot more to the story. Google was only able to sell those ads because it created products that customers felt they needed.
Can GOOG Stock Continue to Deliver?
Now that we know how Google built its empire, we have to see if it is continuing to build such impressive products. Only then can we know whether Google stock will keep following this extraordinary trend. Just look at this chart:
Chart courtesy of Stockcharts.com
Aside from a financial-crisis-related tumble in 2008, Google stock was a steady performer over the last dozen years. It has persistently moved up and to the right. But can Google stock repeat that success? I certainly think so.
Google has developed an internal venture fund that identifies and invests in promising startups. For instance, “Google Ventures” owns part of the company that developed Pokemon Go, the immensely popular mobile video game.
The company also has a stake in “Magic Leap,” an augmented reality headset that Wired Magazine says “exceeds all others.” (Source: “The Untold Story of Magic Leap, the World’s Most Secretive Startup,” Wired, last accessed August 29, 2016)
The company is heavily involved in new artificial intelligence (AI) technology, not to mention that it is bringing a big bat to the cloud computing market. These are just a handful of examples, but my point is simple: Google is still making some of the best technology in the world. No one can argue with that.
So what else is there to evaluate? The technology is there, as are the resources. Google is cash-rich, staffed by a brilliant and creative workforce, and still pushing the boundaries of innovation. That’s why the company doesn’t pay dividends on GOOG stock.
It is continuing to deliver new and exciting growth opportunities for shareholders, which is why Google stock could eventually reach $1,455.00. At that price, the company’s market would reach an astounding height of $1.0 trillion.
Some critics may call that ridiculous, but 12 years ago, they would have said the same thing about an $800.00 price tag for Google stock. They would have been wrong then, and I’ll bet they’re wrong now; the naysayers usually are.
If history has shown us anything, it’s that new technology always creates overnight millionaires. Right now, Google is racing against other tech giants to conquer an emerging technology, and the stakes are absolutely huge. However, there’s one supplier that has contracts with most of the major players in this emerging technology. It is a speciality chipmaker whose stock has doubled in the last two years!
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