When internet giant Alphabet (GOOGL -0.77%) (GOOG -0.75%) went public in 2004, it didn't have the monopoly on internet searches it has today. Granted, it still had between 35% and 44% market share, but few knew it would become the juggernaut it is today. More than 90% of searches now use Google, the world's most visited website.
Each dollar invested in Alphabet's IPO would be worth $55 today. That 55x return over two decades crushes the broader stock market's comparable performance.
While some things like Google search remain intact, Alphabet is a different company than it was back then. And it's likely to be a different type of investment moving forward.
Buying into Alphabet early on would have easily carried an investment portfolio to success. Does Alphabet still have the juice to carry a portfolio? Here is what you need to know.
The greatest $1.65 billion ever spent?
The search engine alone didn't make Alphabet such an excellent investment. Its success stems from arguably the most brilliant acquisition in corporate history. Alphabet spent $1.65 billion in stock to acquire video platform YouTube in late 2006. The company was less than two years old then, but Alphabet saw something special, and it was right.
Today YouTube is the world's second-most visited website. The company generated nearly $8 billion in YouTube ad revenue in its most recently reported quarter. Based on that total, Alphabet effectively recoups its initial investment in YouTube every three weeks.
GOOGL Revenue (TTM) data by YCharts
The combination of Google and YouTube turned Alphabet into a cash-printing machine that sells ads to companies that want to reach the largest internet audiences. Raking in nearly $78 billion in free cash flow over the past year, Alphabet is a deep-pocketed tech giant that can throw money at new opportunities, fend off (or acquire) potential threats, or cannibalize its shares (through repurchasing) to boost earnings growth.
A different investment today
Every company goes through phases where growth speeds up and slows down, but generally growth becomes harder as numbers get big. At nearly $300 billion in annual revenue, you can see that phenomenon in effect for Alphabet now (see chart below). Alphabet isn't the hyper-growth stock it was years ago. Therefore, investment returns won't look the same as in the past.
But that doesn't mean that Alphabet cannot still anchor a long-term portfolio.
GOOGL Revenue (Annual YoY Growth) data by YCharts
The company still invests its profits in growth. It's built a cloud platform and launched software for mobile devices (Android), office software (Google Workspace), and generative AI (Gemini) to rival ChatGPT.
But it makes so much money that it has a lot left over. Alphabet currently has a whopping $120 billion in cash on its balance sheet against just $12 billion in debt. The stock doesn't pay a dividend, but management has instead begun repurchasing its stock. The number of outstanding shares has dropped 10% over the past five years, and shareholders should expect that to continue. Alphabet has spent $60 billion on repurchases over the past year alone.
Is Alphabet stock a buy?
Alphabet is a well-followed stock on Wall Street and a member of the "Magnificent Seven," a handful of mega-cap technology stocks that soared in 2023. The stock price jumped 55% over the past 12 months.
The company's growth outlook looks promising, thanks largely to Alphabet's aggressive share repurchases. Analysts believe the company can compound earnings at over 17% annually over the long term.
Trading at nearly 27 times earnings today, the stock isn't as cheap as before 2023's run. However, Alphabet could justify its higher valuation if it delivers growth that matches analysts' expectations. The current PEG ratio of 1.5 is reasonable for one of the world's strongest companies.
GOOGL EPS LT Growth Estimates data by YCharts
That doesn't mean shares won't be volatile along the way. If you do want to buy Alphabet, consider a dollar-cost average strategy. You buy the stock a little at a time to take advantage of the market's ups and downs, but leave some dry powder if shares fall to a more attractive valuation in the future.
