Google was restructured in 2015 and became one of the subsidiaries of Alphabet. Nevertheless, while Google remains its most prominent business, Alphabet has become the parent company of a diverse set of subsidiaries with business interests in artificial intelligence, robotics software, health and medicine, and autonomous vehicles, among others.
The multinational tech conglomerate is one of the Big Five tech companies in the United States alongside Amazon, Apple, Meta, and Microsoft. It is at the forefront of the internet and remains committed to solving global challenges through innovation. This article explores the advantages and disadvantages of investing in Alphabet stock.
Investing in Alphabet Stock: A Look Into its Advantages and Disadvantages
Pros: Advantages of Alphabet Stock
Alphabet is one of the most valuable companies in the world with a market capitalization of more than $1 trillion. This market cap has specifically earned its spot among the top five most valuable companies across the globe. It is also one of the top 10 companies in the Fortune 500 list of largest companies in the U.S. based on revenues.
Through Google, and in consideration of its advertising and search engine businesses, it is also a leader in digital ad revenue and controls the most popular search engine in the world. It is behind some of the most useful products or services of the modern digital age. These include Google Search, YouTube, the Android operating system, and Google Workspace.
Alphabet has been expanding its hardware business and has also been making big bets on artificial intelligence to power next-generation services. Its holding company structure also gives it more flexibility in pursuing acquisitions and investments in new technologies and businesses. The following are the specific advantages of Alphabet stock:
• Large-Cap Investment: Alphabet is a large-cap stock with a market capitalization of more than $1 trillion. This means that it has better overall stability, liquidity, business model, management capabilities, corporate governance, financial capabilities, and market information than mid-cap stocks and small-cap stocks.
• Growth Stock Features: This parent company has subsidiaries with characteristics similar to growth stocks and even startups. It is also poised for further growth because it aims to introduce new technologies to target new markets. Investing in this company can adhere to the principles of growth investing.
• Defensive Stock Benefits: Furthermore, aside from being a large-cap stock and a growth stock, some also considers it a defensive stock. Its diversified business model makes it less vulnerable to economic downturns compared to other tech companies. Investing in this company can be part of a defensive investment strategy.
• Historical Performance: It has a demonstrated history of returning value to investors. The company has returned about 4000 percent of investments since it went public in 2004 and its stock price has had a strong historical performance even during periods of economic downturns or notable macroeconomic slumps and distresses.
• Market Leadership: Remember that Google dominates the search engine market through Google Search and the digital ad industry through Google Ads. YouTube is the largest video-sharing and streaming platform while Android is the most popular mobile operating system in terms of the number of users.
• Strong Financial Position: Another advantage of Alphabet stock is its strong financial position as demonstrated by its solid balance sheet and free cash flow. The company has enough financial resources and even financial management capabilities to pursue investments in new technologies and markets.
Cons: Disadvantages of Alphabet Stock
The increasing competition in the tech industry threatens some of the businesses and services of Alphabet. Google Search might be the dominant search engine in the world but Microsoft Bing and the emergence of generative artificial intelligence services and applications threaten to change how people find information and websites on the internet.
Furthermore, considering its diverse business interests, some of its subsidiaries are struggling to make a considerable mark on their respective markets. Google Cloud services compete with incumbents like Amazon and Alibaba while Waymo is still far behind with its goal of introducing to the masses autonomous vehicle technologies.
The company might have the financial position to explore new business opportunities but it has also been criticized for its large spending on acquisitions, new technologies, and markets. These pursuits need to be viable or must produce value for them to be considered worthwhile bets and avoid losses. Below are the specific disadvantages of Alphabet stock:
• Does Not Offer Dividends: The company has no history of offering dividends. It prefers to reinvest its profits in repurchasing its issued shares or in value-creating pursuits such as acquisitions and research and development. This is a notable disadvantage for investors looking for a reliable stream of passive income.
• Concentrated Revenue: Alphabet draws most of its income from Google and its related internet services. Its earnings are specifically heavily reliant on digital advertising revenues. Changes in the digital advertising landscape and specific internet usage behavior would have a lasting impact on its revenues.
• Cyclical Advertising Market: Remember that this company remains a defensive stock but it is also important to underscore the fact that its digital ad business is cyclical. Advertising expenditures depend on the boom and bust phases of the economic cycle. Revenues from ads are often low during economic downturns.
• Impact of Competition: The different competitive forces threaten the medium-term to long-term prospects of the company. Competition and the emergence of newer trends from technological innovations also pressure it to invest more in new technologies and new markets while increasing its hit-or-miss rate.
• Risk From Regulation: Another possible disadvantage of Alphabet stock is the risk that arises from regulation or policies. Increasing scrutiny of its operations can lead to fines or legal costs and other fees, market restrictions, substantial organizational restructuring, and even the breakup of its existing business model.
• Uncertainties in Some Projects: Investing in Alphabet means betting on the possibilities of its new projects and the prospects of its smaller subsidiaries. The success of these pursuits is not guaranteed. Take note that its self-driving cars and healthcare solutions are still struggling to produce reliable income and profits.