In case you haven’t noticed, Alphabet Inc (NASDAQ:GOOG) is now the second-largest company in the world by market cap. Moreover, if you ask Wall Street analysts where Google stock might be going next, you are most likely going to get a bullish answer. In fact, the median price target for Google stock is at $905.00, $200.00 more than what the stock is currently trading at. So, why are analysts so bullish on the stock?
Google Stock: Wide Economic Moat
As it turns out, Google has perhaps the widest economic moat in the business.
Coined by legendary investor Warren Buffett, “economic moat” refers to a company’s competitive advantage that can protect itself from the competition. If a company wants to outperform its competitors in the long run, it better have some durable competitive advantage.
By being the first mover in the search engine business, Google managed to build a search engine so powerful that no competitor can even come close to it. The best part is that the company’s giant size has become an economic moat of its own.
You see, in the search engine industry, there is something called the “network effect.” To put it simply, the more people using the product or service, the better it becomes. For search engines, the one with the largest market share can provide the deepest and most contextualized search results. By being the largest player in the search engine game, Google’s future success in this segment is almost guaranteed.
Note that search is not the only business that’s bound to do well. Google also has the leading video streaming platform YouTube.
YouTube is the top multimedia web site in the U.S. According to Statista, YouTube had a massive 73.6% market share in October 2015. Other multimedia web sites could only dream of such dominance. In the same month, Netflix only had nine percent market share, while Hulu had a measly 2.6%. (Source: “Leading Multimedia Websites in the United States in October 2015, Based on Market Share of Visits,” Statista, last accessed March 9, 2016.)
In the most recent quarter, YouTube’s revenue grew 12% sequentially to $4.1 billion. (Source: “Alphabet Q4 2015 Results-Earnings Call Transcript,” Seeking Alpha, February 1, 2016.) Given its dominance in the online video streaming industry, YouTube could continue to be the go-to choice for viewers, content creators, and advertisers.
The Bottom Line on GOOG Stock
Of course, no company is perfect, not even Google. While search and YouTube have been going strong, the company still has areas that need to improve. For instance, its social network “Google+” is yet to compete with industry giants like Facebook. Moreover, it’s not clear whether Alphabet’s costly moonshot projects can turn out to be successful.
However, those concerns won’t be material in the eyes of investors. As long as Google’s core businesses keep growing strong, investors will keep loving Google stock.