Motley Fool Hidden Gems Investing - An Alphabet Stock Deep Dive

Starting point is 00:00:00 Alphabet is one of the biggest companies in the world, so it's time to take a deep dive. Motley Fool Money starts now. Welcome to Motley Fool Money. I am Travis Hoyum, joined today by Rachel Warren and Lou Whiteman. and we have a big event today going on this week for Motley Fool One members. We're recording this a little bit early, but I still get to get together with Rachel and Lou to talk today a little bit about Alphabet. This is one of those companies that just seems to get bigger and more powerful by the year. So we're going to go through some of their biggest businesses. And then at the

Starting point is 00:00:45 end of the show, in the last segment, we're going to talk a little bit about what the future of this company might look like, some hidden gems that might be hidden on the balance sheet. But Lou, I wanted to start with their core business. And what we're going to talk about as the core is search and others, the way that they report it, the network revenue, that's the one segment that's in decline, and then what they call subscription platform and devices. This includes Android and all kinds of other stuff involved in there. But this is really the business that we thought was potentially going to be disrupted by things

Starting point is 00:01:16 like ChatGPT. Well, that didn't happen. Search is now growing double digits in 2025. I think we'll probably expect about the same in 2026. Subscription platform and devices grew over 20%. I mentioned that network business is in decline a little bit, but that's more structural the way that the internet has changed. So when you think about this core four alphabet,

Starting point is 00:01:39 where is this business going in the future? So it's stable. And whether or not the growth is sustainable, I don't know. but I think the goal is, and the special about Alphabet, what's unique about Alphabet is, is that stable is good enough. I mean, I am talking about the whole thing put together here because search, is search stable? I don't know. Search is evolving, but I've seen enough to conclude that Gemini can at least prevent that from being a total collapse. So I'm not worried about it. I don't know what the net net is after, but even if search goes down, Gemini goes up.

Starting point is 00:02:12 stable is good enough here because alphabet is set up with this unique structure where we have this cash cow and then we are going to invest in growth elsewhere the flywheel is healthier now than it has ever been if they get growth from this core business all the better then we're not going to discount that as investors we like that but what's important is is that we can fund these other bets, these side projects that can turn into something. And those other bets have never looked more mature and more stable. It used to be a frat house and now it is actually a collection of businesses. So the bottom line here is, is that the core business growth there is sort of the icing on the cake. The thing is, is just, can it sustain? And the answer is a solid yes.

Starting point is 00:03:00 Rachel, do you think that's right? This is, we'll talk about some of the growth segments and some of the maybe potentially even more difficult to disrupt, but this is 302, the segments I talked about, $302 billion worth of revenue in the last year alone. This just seems like one of those businesses that even when you get to this size, you seem to run into the large numbers and Alphabet just never seems to. You know, it's funny because I think so many of the companies that we see throwing money at AI, there is not a cohesive strategy and nothing could be further from what we're seeing with Alphabet, which the foundation of its business is arguably the most successful advertising engine in history, right? This is a very stable business, like Lou said.

Starting point is 00:03:42 But it's worth noting, I mean, the growth continues to accelerate. You know, their annual revenue surpassed $400 billion for the first time, right? Search revenue alone hit $63 billion in a single quarter in Q4. And I think the really important thing is obviously this core of the business, the search business, the big fear has been, okay, well, now that we have all of these amazing AI tools that's going to completely cannibalize traditional search. But I think what we are seeing and what we continue to see is that those AI-driven features that they're incorporating, driven by Gemini, a lot of these other tools they're rolling out are actually increasing user engagement. It's keeping people on the platform longer for much more complex

Starting point is 00:04:22 queries. It's opening up higher value ad inventory, which is really key for the advertisers on Google. And even with the rise of chat GPT, perplexity, Google's search volume remains at historic highs. And this is because I think of a variety of reasons, one of which this habit of quote unquote Googling, right, is highly ingrained in our global culture. And so I think that that has created a really exceptional foundation as they move into this next era of growth. I do think it's fair to argue that they are starting to transition from, you know, more of a high margin software only model towards a more capital heavy infrastructure model. I know we'll talk about that a bit more in the next segment, but I think that this is the next part

Starting point is 00:05:04 of the growth story for Alphabet. I like where it's going. And I think compared to a lot of the other tech businesses we see that are throwing money at AI, not sure where it's going to stick, we're seeing a really, really well-defined strategy. Lou, when we look at Alphabet, one of the things that strikes me is the sentiment has changed around the company so much over the past 12 months, a lot of that is really related to search and how they're folding in artificial intelligence. When you look at a company like this, and we'll talk about some of the other value that's hiding on the balance sheet, but stock is now trading for 30 times earnings, but revenue is growing double digits. Is this the kind of business that in a world of AI,

Starting point is 00:05:42 AI can be a sustaining innovation for them and even potentially a growth driver in these core segments, what we know from Google, the old, old Google, is this going to be something where I always think of my wife as, as an example, she's using AI, AI mode in search, but is not using chat GPT or anthropic. Is that going to be more people than not in the future? And Google's just still going to be this massive winner a decade from now. So I'm going to, I'm going to change the question a bit, but I bet, I think, you know, you're onto something here is that, yeah, I mean, You know, whichever consumer product people use, yeah, I think they will use Gemini, but whether that matters at the end of the workday, who knows. But for all the attention

Starting point is 00:06:24 on the hyperscalers, and yes, Google Alphabet is one of the hyperscalers, I think the value in AI isn't necessarily going to go to the hyperscalers. It's going to be with the subtle refinements in a trillion different business processes that can come out of AI. I think the real benefit of AI for Alphabet is exactly what you're saying. Just the tiny little changes or the things that you either get more efficient, more sticky, better in all of these core businesses we're talking about, they still have a ways to go. The auto-complete in Gmail is kind of ridiculous right now, so we're in early stages. But just a trillion different things like that, getting that right and just infusing AI in, I think that is the path and not just spend a quadrillion dollars

Starting point is 00:07:12 one as a hyperscaler and no one is better than them at that microsoft's the only one that really even sniffs that all right final question lou when you look back on alphabet's history there's been a lot of throwing spaghetti at the wall and we talked about that with companies like open ai but you look at some of this big spaghetti they've thrown at the wall are moves like building chrome buying and building out the ecosystem for android you have things like maps is this going to ultimately be the moat that makes this an enduring business, not just that search bar, but all the stuff they've built around it. So again, I go back to the beginning. I think the core that they have created, and yes, they created it by just trying different things. They

Starting point is 00:07:55 were a search company that decided to do email, you know, but I, you know, I think we get it, but, but that has created just this core that generates the cash needed for them to try new things. And so, yeah, I think, I mean, you know, how, whatever alphabet looks like in 10 or 20 years. I think that the foundation that they have built is right up there with- So was that accidental though, or was that intentional? This is what's always so interesting to me with Alphabet is they seem to be in this perfect position today. It's just both is that, hey, we threw so many things at the wall and if we built this unintended mode around ourselves in a world of AI, cool. I think they intentionally tried a lot of things knowing... This is the old

Starting point is 00:08:37 Silicon Valley cliche. They weren't afraid to fail. They went out and said, we are going to try a lot of things knowing full well, only some of them are going to stick. So I think it was intentional, the attempt, but I doubt they could have predicted exactly how it turned out. When we come back, we're going to talk about, I think maybe the biggest hidden gem that's YouTube. You're listening to Motley Fool Money. at A&W. And what better way than with a delicious Pret organic coffee, starting at just $1 all day, every day, now until December 31st. You gotta try Pret first at A&W. At participating A&W locations in Ontario.

Starting point is 00:09:28 Welcome back to Motley Fool Money with the Hidden Gems team. Rachel, one of the fascinating businesses under Alphabet is YouTube. I thought it was a crazy acquisition when they made it, a little over a billion dollars. Maybe the best acquisition in the history of technology up there with Instagram, Facebook buying Instagram. But over the past year, they've generated over $40 billion worth of ad revenue. We know that that does not include, they don't report the specific numbers for YouTube. This is something I think a lot of us wish they would with operating income is things like that but you add in the prescription the subscriptions uh premium if you pay for that it's over 50 billion dollars in revenue we know that probably more like 60 billion

Starting point is 00:10:11 in revenue this is a business that's now bigger than netflix uh has more viewing time than netflix even on tvs it's the biggest streaming service in the world is this this just seems like a hidden gems sitting under YouTube or under Alphabet, and it's got the backing of the biggest ad network in the world. Yeah, I mean, that's absolutely right. It's funny because I think even now when people hear streaming, they think Netflix, they think Disney+, but the reality is that YouTube has become very quietly the undisputed leader here. It's the number one streaming service. It accounts for, according to Nielsen, more than 10% of all TV viewing, beating out every other paid platform. So you're talking about a platform that has effectively replaced traditional cable for an entire generation or series of generations at this point.

Starting point is 00:11:02 And if you have kids, you know that. It's true, right? And it's such a combination. You've got like a 24-7 global newsroom, music service, immense library of educational and entertainment content, podcasts, all under one roof on this one cohesive platform. And from an investment perspective, YouTube is really this ultimate high margin growth engine because the users on YouTube are really the ones doing the heavy lifting. You've got Netflix that spends about $20 billion a year on original content just to keep people from unsubscribing. YouTube's inventory is created by millions of creators. And then Google only pays them out once the ad revenue hits a certain point and actually rolls in. it's a genius model, low risk for Alphabet, infinite scale, very, very sticky. You noted those numbers at the beginning, probably about 60 billion or more combined in subscriptions and ad revenue from YouTube. So much growth there. I think it's just very clear that this is a

Starting point is 00:12:00 platform that is part of the modern media landscape and continues to play a more pivotal role in viewership. So I don't want to be the bear here because it's a great business, but maybe splash a little cold water on that is it a genius model it's a different model yes that they they're it's also one that seems to be harder to copy i mean you know disney plus paramount can sort of copy what netflix is doing none of them are going to be able to do i don't know i mean tiktok is better at it at gen z right now the thing is is that a lot of it is garbage it's just a different model right yes if they pay less but it's lower value content i i don't know what to make of the, I think the YouTube Netflix comparison only really matters to people like us.

Starting point is 00:12:43 They're just kind of different businesses. Okay. And they're going after different things. One is, you know, yeah, a lot more expensive to create, but I think has the ability to charge a premium. The other one has got to rely on advertising on a lot of the user-based content. That's, that's both, that's the beauty of it and the flaw. Here's the thing though, you know, I'm glad we brought up the cable thing, because I think about this a lot. Netflix, as long as Netflix can produce quality, I think there is a place in my life for Netflix. But as we get to a future where fewer and fewer people have cable, where some of these traditional networks go away, I feel like that the cable replacement isn't necessary either one day, that it'll just be... Right now, my Roku is just a

Starting point is 00:13:30 series of apps. One of the apps is YouTube TV that gets me those old world TV channels as those go away. Do we really need YouTube TV? Uh, you know, and if so, we just need to YouTube. I think that's the point. YouTube TV, it's the platform, the whole platform. Well, right. But a lot of the revenue right now is coming in through YouTube TV, advertising, sustained businesses are difficult. Okay. And you know, it's just, the world is changing. They have a place. Netflix has a place who has more, depending on what your metric that's, that's not really important, but here's the thing. I'm not a big fan of this business or I'm not like just gaga about this business, but I respect Alphabet's ability to evolve with the market. And I suspect it'll still

Starting point is 00:14:17 be a contributor over time. And that's what counts. All right. If Alphabet wants to disclose how much revenue comes from YouTube proper, how much comes from YouTube TV. We can finish this argument. But if you have comments about whether you love YouTube or not, leave them in the show notes. Leave them for Lou. All right. Let's move on to Google Cloud. This is the one that's gotten the most attention over the past few years from investors. The numbers here are crazy. So a few years ago, it was actually the March 2023 quarter was the first time that Google Cloud made an operating profit. So it was not making an operating profit until then. In the most recent quarter, Google Cloud grew 48% to $17.7 billion worth of revenue and had an operating margin that

Starting point is 00:15:06 nearly doubled from a year ago to 30.1%. Rachel, this seems to be, if you're looking for growth under Alphabet, this is it. It's not a majority of revenue yet, but man, it could be in five or 10 years, it seems like. Yeah, I mean, this is becoming an increasingly important growth engine for Alphabet's business. Incredible, you know, $240 billion backlog that surged, I think, more than 50% recently. A lot of that's driven by enterprises desperate for AI infrastructure. I think the real potential here for Google Cloud is the transition, you know, from hosting data to being really the AI factory for the world's biggest companies. As we're seeing a lot of businesses move past that experimental phase of AI. They need the massive scale that really these

Starting point is 00:15:51 big tech companies can only provide. And for Alphabet, you know, it's about those very high margin AI services that maybe could make cloud as profitable as search. You know, it's interesting to see with the chip wars and their custom TPUs, the place that they could play within this fight. I mean, obviously NVIDIA's GPUs are the industry gold standard, but Google's the only cloud provider that has really successfully built its own top tier AI silicon. So I do think this gives them something of a vertical integration advantage that's potentially going to be really hard to beat. You know, it avoids the so-called NVIDIA tax. They can offer those AI services at lower prices than competitors. Not about putting, you know, NVIDIA out of business, but it's really about

Starting point is 00:16:30 creating, I think for Alphabet and Google, a walled garden where they can run the world's most powerful models cheaper and more efficiently. And that's something I'm really bullish on. Yeah, Lou, it does seem like they've kind of used price as a weapon in the market to gain market share. And the fascinating thing is they seem to have lower prices for serving AI models and they have a pretty darn good margin at this point. Yeah. Yeah. As I said earlier, the, the Gemini versus Claude versus, uh, you know, chat, that, that bores me. I think that that's, you know, that we'll see where that goes, but I do see the importance of AI, even if I don't know of having the winning model really matters. And they are the undisputed utility of AI,

Starting point is 00:17:13 whether ever it is, whether it's capacity, whether it's chips, whether all these things, and look, they don't even have to be the best at this. I don't think it matters if NVIDIA chips are better than Alphabets or if Alphabets are better than NVIDIA. NVIDIA is all about the chips. As long as they can have, even if they have the second best offering in so many different areas of AI, they are going to win here, period. And that's, I think, what matters. And we can debate which AI is better, which chip is better, any of those. At the end of the day, they're going to sell these things. They're going to sell it. And that is their advantage. They're not just one part of this system. They are everywhere. Who would have thought that in the early 2000s, when they

Starting point is 00:17:56 were buying up data centers on the cheap and dark fiber, that would ultimately be one of the huge advantages in artificial intelligence. Taking those microseconds out of searches now means they're serving artificial intelligence faster than most of their competitors right now. When we come back, we're going to get to some of the other hidden gems in Alphabet's portfolio. You're listening to Motley Fool Money. You've got to try breakfast at A&W You've got to try breakfast at A&W And what better way than with a delicious Pret Organic Coffee

Starting point is 00:18:33 Starting at just $1 all day, every day, now until December 31st You've got to try breakfast at A&W At participating A&W locations in Ontario Welcome back to Motley Fool Money with the Hidden Gems team. Speaking of Hidden Gems, Rachel, there is this entire other bets business under Alphabet. That's why it's called Alphabet now and not Google. I wish they would just change it back, but that's neither here nor there. What Hidden Gems are you looking at in this portfolio that you're excited about? I'm kind of interested in the healthcare part of the business. So Verily Health,

Starting point is 00:19:10 it used to be Google Life Sciences, right? And they rebranded a little while back. They're transitioning into an independent company. I think they raised about $300 million in a recent funding round. It's all about AI-driven precision health research and care. It used to be really sort of this hodgepodge of projects, like contact lenses at one point, but now Fairly Health is really gearing to be a very focused AI-native platform offering tools for research and clinical care designed to really kind of aggregate complex data, connect users with licensed clinicians. You know, there's virtual care, coaching, medicinal management, really interesting business. I think it's one that doesn't get as much attention.

Starting point is 00:19:50 And it's certainly one that I'm keeping a close eye on because getting more into the world of digital care, I think, could be a real opportunity for the business. If this becomes the place that we search, watch TV and get our health care, I don't know. That's that's a lot of a lot of Google in one place. Lou, what do you what are you excited about? So maybe I'm in Atlanta. I see them all the time. But Travis, I was just commenting to you that it's kidding. Every time I drive in Atlanta, I see four or five Waymos. So they're either stalking me or there's an incredibly large number of Waymos on the road. And I'm guessing it's the latter. I'm not sure, but I'm guessing it's the latter. I mean, look, this is, I think,

Starting point is 00:20:29 a $120 billion plus business just up from less than half of that in late 2024. Revenue run rate is still pretty low, but it's probably near $500 million or so or approaching that. They added Nashville, I believe, this morning. That was their 11th city that their first number. Again, they just have a ton of cars out there. Look, this is going to be a public company, period. Google Alphabet is going to own a big part of that to the extent that they want it. I, I think that Waymo is the model for everything else they've done in other bets at this time. They have some other fun things we can talk about from delivery to, you know, advanced quantum and all of that, but not all of them are going to work out this well. If only one or two do that is,

Starting point is 00:21:20 that's a venture capital model. And that just, that is again, all of that stability, all of that just ability to put cash into interesting projects. This is the payout. This is, this is the happy ending interestingly enough my wife texted me this morning in from downtown minneapolis uh saw her first waymo no driver so we are already at the point in minneapolis where they've gone through all the testing they've had the safety driver i think that's you know the phases are pretty well known at this point i wouldn't be surprised if here we're we're seeing fully commercialized operations this summer if they're able to translate that then through the winter that's where you get a massive addressable market because that opens up a lot more cities than

Starting point is 00:22:02 they've had currently in the South. Lou, as far as Waymo goes, $126 billion valuation at a fundraising round of $16 billion earlier this year. If Waymo goes public, let's say three years from now, do they hit a trillion dollars just Waymo? Oh, who knows? I mean, probably just the way things are moving right now? Well, Tesla's worth over, or has been worth over a trillion dollars. And that was on the promise of FSD. They're actually scaling fully commercialized operations with autonomous vehicles. Yeah. I mean, Travis, I'm not going to use Tesla's valuation as a comparison for anything. That's just a different animal. You know, yeah, it's going to be big. It's going to go up from here. Inflation will do that to

Starting point is 00:22:48 you. But yeah, no, there's a lot to be excited about there. The other two things I'll mention quickly is they own somewhere between 6% and 10% of SpaceX. We'll figure that out if they go public in the next couple of months. So a couple hundred billion dollars. And they also own about 14% of Anthropic. So just hiding on the balance sheet, that's not to mention investments in companies like Stripe, huge VC arm. So several hundred billion dollars in value just in the equity in other companies for Alphabet as well. As always, people on the program may have interest in the stocks they talk about in The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content

Starting point is 00:23:26 follows The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd behind the glass, I'm Travis Hoyum. Thanks for listening to Motley Fool Money. We'll see you here tomorrow. Thank you.

Motley Fool Hidden Gems Investing - An Alphabet Stock Deep Dive

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