Using weakness to initiate a high quality name: Google (GOOGL)

Monday, 25 Oct 2021 

Last Friday, we initiated a position in Google (GOOGL). We have been eyeing this high quality name ever since we started this portfolio. After the purchase, GOOGL represents 1.2% of our portfolio. We intend to buy more on pullbacks, growing this position to 3%. 

We used a sector-wide sell-off on Friday to go shopping. Shares of GOOGL declined 3% on Friday, now sitting at 6% off from all time high. This comes amid news from Snapchat (SNAP), which actually declined 26.6% in a single day, after the company said Apple (AAPL)'s App Store privacy policy will prove a challenge to target a measure digital advertising. SNAP also said the supply chain issue will also hurt the advertising sector, as companies are decreasing ad-spending (for example, car manufacturers stopped doing advertisements for a while because of the semiconductor shortage). These two pieces of news sent the entire digital advertising sector down.

We believe this was a good buying opportunity in GOOGL, because the company has been prepared for this exact sort of change from Apple, by investing on developing their own measures. Also, it's important to realize GOOGL's business model has so much more than digital advertising; it's the cloud business, artificial intelligence, potentially electric vehicles with driverless technology. The market knows this, which was why GOOGL wasn't down nearly as much as SNAP, which is a small company heavily reliant on digital ads.  

Fundamentals

We believe Alphabet (GOOGL) is well-positioned for a continued recovery in digital ad spending and further momentum in the cloud business, as we continue with the re-opening effort around the world. Supply chain issues will alleviate, leading to ramped-up spending in digital advertising for manufacturers such as cars, computers or telephones. While search and digital ad dominance is what will carry shares in the near- to- midterm, longer-term it is the company's artificial intelligence (AI) "moat" that will provide for new avenues of growth. AI is what has made the company's Search, Video (YouTube) and targeted ad capabilities best-in-class and is the driving force behind the company's success in voice (Google Home) and autonomous driving (Waymo). Furthermore, we believe it is this disruptive AI expertise that will also make the company more prevalent in other industries, including healthcare via subsidiary Verily. Additionally, we believe Alphabet's willingness to invest in new areas, knowing most will fail, is a recipe for long-term success. Lastly, Alphabet's free cash flow generation and solid balance sheet set it apart and are what will allow the company to continue taking chances on far-out ground-breaking and potentially world changing projects. 

We have a price target of $3,000 on this stock, reflecting a ~28 times forward earnings (compared to a 21x multiple of the S&P500).   

Bottom line, GOOGL is a high-quality growth stock, with strong growth in its earnings for years to come. We're using the recent weakness as a buying opportunity, but we will leg to this position gradually to build a good cost-basis for a long-term investment.