Think Google Stock Is Past Its Prime?
Alphabet Inc (NASDQ:GOOG) is basically a dream asset to most investors. Google stock has skyrocketed not once…not twice…but three times. Can it happen again?
You better believe it can. Just look at Google stock’s performance compared to other investments in the market.
Over the last 52 weeks, the S&P 500 fell by -0.67%. A lot of stocks fell into negative territory during the bear market, which should make you nervous. It’s a risky time to be in equities.
Things got even worse if you look at the so-called “growth” stocks, though…
Small-cap companies seem exciting because they can have big swings on any given day, but I only trust the long-run numbers. And the long-run numbers aren’t good.
The iShares Russell 2000 Growth Fund, an exchange-traded fund (ETF) that invests in a basket of “growth” stocks, lost 11.25% over the last year. It lost more than 1/10 of its entire value!
By contrast, investing in Google stock would have earned you 37%.
Even though Alphabet is already one of the biggest companies in the world, it still crushed the so-called “growth” stocks. How is that possible?
Well, Google isn’t like other firms. Its growth doesn’t plateau after a big run because the company continues to innovate. It’s encoded in the company’s DNA and here’s why…
Co-founders Sergey Brin and Larry Page built Google around an idea called “20% time.” (Source: “Just How Valuable Is Google’s ‘20% Time’?” Harvard Business Review, August 20, 2013.)
The idea was a philosophy that every staff member should spend 20% of his or her time on a passion project that could keep Google at the forefront of technology.
Over a dozen years, “20% time” led to some of Google’s biggest wins, including “Gmail,” “Google News,” and “AdSense.” These products have been incredibly profitable.
Brin and Page outlined the idea in a 2004 initial public offering (IPO) letter: “We encourage our employees, in addition to their regular projects, to spend 20% of their time working on what they think will most benefit Google,” they wrote. “This empowers them to be more creative and innovative. Many of our significant advances have happened in this manner.” (Source: “‘An Owner’s Manual’ for Google’s Shareholders,” Alphabet Inc, August 18, 2004.)
Google encourages its employees to have these flights of fancy because they pay off BIG TIME. I doubt most staffers use the full 20%, but the important thing is that they can if they need to. It is part of the company’s ethos.
Having this luxury makes Google the ultimate investment. Investors get the unparalleled safety of a large-cap stock combined with the growth potential of a small-cap stock. Safety and growth all wrapped up in one neat package.
In other words, Brin and Page effectively used “20% time” to turn Google into a perpetual growth stock. It was a masterstroke that has paid dividends time and again.
For instance, the “Android” operating system (OS) started on a whim. It began as a simple challenge to Apple’s increasing dominance over the smartphone market. But Google couldn’t risk putting huge investments into manufacturing its own device, so it simply licensed out the Android OS to smartphone makers.
Companies like Samsung, HTC, and LG all jumped on board. After all, why wouldn’t they?
They got a top-shelf operating system for next to nothing. Meanwhile, Google was able to claim the majority of the smartphone market without getting bogged down in manufacturing.
It was a low-risk, high-reward strategy. And judging from recent information, it has paid off enormously well.
Documents from a lawsuit show that Google made $42.0 billion in revenue from the activation of three billion Android-based smartphones. After all the costs were factored in, Google still walked away with $21.0 billion in profit from Android. (Source: “Google’s Take From Android Pegged by Oracle at $42 Billion,” Bloomberg, May 10, 2016.)
AdSense is another graduate of Google’s “20% time.” For the mass public, Google is a search engine, but to advertisers, it is the toll road for Internet advertising. If you want to advertise something on web sites, you usually have to go through Google’s AdSense.
And how much bacon does that bring home, you ask? How about $18.0 billion in just three months? Because that is exactly how much Google made in advertising revenue over its most recent quarter. You can thank the company’s “20% time” policy for that. (Source: “Alphabet Announces First Quarter 2016 Results,” Alphabet Inc, April 21, 2016.)
This obvious correlation between innovation and profits is why I love Google stock.
The company is like a venture capital firm on steroids. It devotes time and resources to a thousand different ideas with the hope that a few of them will work on a massive scale.