Alphabet Inc: Pokémon Game Could Send GOOG Stock Surging

Alphabet IncPokémon Game Funded Through Google Ventures

The recent hype around an online Pokémon game showed one thing: that investors still have Alphabet Inc (NASDAQ:GOOG) stuck in a box labeled “online advertising.” They don’t yet see GOOG stock for what it truly is…

Does Google make most of its money from advertising revenues? Absolutely, but that isn’t what made the company invest in Niantic—a software developer that came up with the “Pokémon Go” game—and it isn’t what will drive the company’s growth in the future. (Source: “Nintendo, Google to Invest up to $30 Million in Niantic, Maker of Mobile Pokémon Game,” Recode, October 15, 2015.)

Google is an investor, plain and simple. Its in-house venture capital fund makes bets on cutting-edge technologies, from the Pokémon game to an augmented reality (AR) company called Magic Leap. All of these strategic investments can add up over time.

That’s how I think about Google stock. It is basically a venture capital fund that invests into startups at an early stage. Even if only one of those companies makes it big, the gains could be enormous for Google. The Pokémon game is basically proof of that concept.

In less than a week, the Pokémon game has had more downloads than “Tinder,” and almost as many as “Twitter.” People are opening this app more often than “WhatsApp,” “Instagram,” “Snapchat,” or “Facebook Messenger.” It is the biggest mobile game ever launched—period.

This phenomenon has put Niantic on the map. The company was virtually unknown last week, but now they seem on track for an eventual initial public offering (IPO). Talk about a meteoric rise.

Google was able to see potential in this company because it knows what good innovation looks like. The company’s entire history is littered with miraculous breakthroughs, implausible inventions, and unlikely discoveries.

Earlier this year, the company showcased its artificial intelligence software beating the world champion of “Go,” a strategy game so complicated it makes chess look more like checkers. And how did they get that artificial intelligence (AI) software? Through an acquisition, of course. (Source: “Google Acquires Artificial Intelligence Startup DeepMind For More Than $500M,” TechCrunch, January 26, 2014.)

Early in 2014, Google bought a London-based company called DeepMind. Although that deal was an outright purchase, it still goes to show that Google has an eye for talent. It is the technology equivalent of Warren Buffett’s Berkshire Hathaway.

Like Buffett’s uncanny ability to pick underpriced stocks, Google can spot a valuable start-up from a mile away. Even internally, the most innovative ideas are what make their way to the top. “Gmail,” “Google Maps,” “Android”: these were all innovative add-ons to the firm’s core function—search.

Now, Google is looking for innovation that translates into profit. The company was reorganized into Alphabet specifically for this purpose. It divided the income statement into two categories: “Google” and “Other Bets.” (Source: “Alphabet Announces First Quarter 2016 Results,” Alphabet Inc, April 21, 2016.)

The “Other Bets” is meant to develop new ideas into fully-fledged businesses. Having scored such a big win with the “Pokémon Go” game is good, but it’s only a sliver of the company’s potential as an investor. I see it driving a majority of Google’s growth in the coming years, which is a major reason for being bullish on GOOG stock.