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In life, we are taught that the more effort we put into an endeavour, the more success we might get out of it. That gave us an assumption that more actions equal more success. That is certainly true for learning a skill like playing the piano or driving a car. However, when it comes to investing, that mantra might do us more harm than good. This is because if we put in more action in investing by trading more, it is highly likely that we will end up making more mistakes along the way. Since our wealth will grow the fastest if it can be compounded, our small mistakes at the beginning could cost us dearly over the long term.
This is one reason why I practice the strategy of buying and holding on to great stocks. It might not give me the maximum return every single year, but it allows me to reduce the number of mistakes I will make when investing in the stock market. Thus, when I invest, I like to look for stocks I can continue to hold for the next decade or beyond. This means that would need to understand what are the enduring trends that will continue to grow for the next 10 years. From that, I can seek out industries and companies that would benefit from these trends. So, today I like to share two such companies which I have invested in and still feel will have massive growth potential for the future.
#1: Alphabet Inc (NASDAQ: GOOG / NASDAQ: GOOGL)
This is a company I have known for a long time. It is a business I understand but yet never occur to me that I should be investing in it until a few years ago. This is Alphabet Inc (NASDAQ: GOOGL), the parent company of Google. It is a company that has shaped the internet and affected all our lives and yet most of us might have never spent a single cent on the company before. The interesting fact is that it is still able to achieve a revenue of USD 220 billion in the last twelve months and here is how it does it.
Alphabet Inc is a collection of companies but yet 99% of its revenue and more than 100% of the profit is coming from Google alone.
Today, the company reports its business in two key parts; Google and “Other Bets”.
In the last twelve months, the company made USD 220 billion in revenue and USD 63 billion in net profit. Out of that, 99.6% of that comes directly from Google.
Google Core Advertising
Within Google’s revenue, 69% of it comes from its core advertising sales over the first half of this year. These are direct advertising revenue that is generated from their platforms. The core platforms within Google with more than 1 billion monthly active users (MAU) each includes:
Advertisement within their platform comes in many forms, here are some examples:
Ads on Search, Google Maps & YouTube
Anyone can create an advertisement and push it through Google’s platforms and Google will be paid for that advertisement charge the advertisers based on cost per click (CPC) [whenever someone clicks on the ads] or by cost per mile (CPM) [per one thousand impressions].
As its main revenue for supporting all its different assets is coming from advertising, Google competes with any other services that have a similar business model. This means that competition ranges from other search engines like Microsoft Corporation’s (NASDAQ:MSFT) Bing, Baidu Inc (NASDAQ:BIDU) or Yahoo (Verizon Communication Inc’s (NYSE:VZ)) to social media platforms like Facebook Inc (NASDAQ:FB) and even offline media like Newspapers, television billboards and magazines.
Another growth area for Alphabet is from its Android platform. Google Play Store basically acts as the digital mall for most Android devices. Google actually takes a cut of the revenue when we buy a paid APP and also make any in-app purchases from APPs we have downloaded through the Google Play Store. Typically, Google will take a 30% cut from all this revenue, making it a highly profitable landlord.
Google Play Store mainly competes with Apple Inc’s (NASDAQ:AAPL) iOS Appstore in the smartphone space but also with other Android Appstores (especially in China) by Tencent Holdings Ltd (HKG:0700), Baidu Inc, Qihoo 360 (SHA:601360), Huawei and even Xiaomi Corporation (HKG:1810).
However, there are some interesting new segments of business for Google now and these have been growing quite strongly over the past few years. This segment of the business is now 8% of Google’s revenue. Since the end of 2020, these are separated out as Cloud Services and Other Bets.
Google’s cloud services include its Gsuites, which is its enterprise software like mail, Google docs, Google Drive, for companies. It also combines its computing services that competes directly with Amazon.com Inc’s (NASDAQ:AMZN) Amazon Web Service and Microsoft’s Azure.
Alphabet invests and starts what they called “Moonshots” projects. These are projects that might not pay off straight away but could potentially become a huge business in the future. However, these investments and projects are still relatively small in comparison to the whole company. Its subsidiaries from this segment have only generated about $390 million year to date. However, Alphabet has been a very active investor in other companies over the years. Some of its investments include prominent names like:
Uber Technologies Inc (NYSE:UBER)
Telsa Inc (NASDAQ:TSLA)
Slack Technologies Inc (NYSE:WORK)
Docusign Inc (NASDAQ:DOCU)
JD.com Inc (NASDAQ:JD)
Alphabet Inc might be a USD1.81 Trillion company but it is a growing company. Its revenue has been growing at about 18.8% over the past three years. Its net profit has also been growing even more impressively at 47% a year over the same period.
Data from ShareInvestor WebPro
In terms of geographical breakdown, Alphabet still counts the US as its key market, generating about 45% of revenue in its home country. Europe, Middle East and Africa takes up about 31% of its revenue while Asia Pacific contributes 19%. The rest of the Americas provide the reminding 5% of the group’s revenue.
Some of the more interesting growth areas that I am quite optimistic about are:
The growth of YouTube I believe YouTube would continue to be a more important part of the business. 11% of its revenue is coming from YouTube advertising alone. And that is a segment growing at 66% a year. That growth should continue for many more years as YouTube become a default video platform for the internet. There are still many areas of growth YouTube can implement, including competing with services like Netflix or Spotify (subscription) in the future. It already has such services in the US now with YouTube Red and YouTube TV. There could be potential if YouTube starts rolling out these services worldwide.
Cloud Computing Given how we have seen the growth of Amazon’s AWS and Microsoft’s Azure in recent years, it can be expected that Google Cloud could see such huge growth as well. In fact, Google is already the third-largest provider of cloud services in the world now. As Google has huge investment in artificial intelligence and machine learning capabilities, those could be useful tools within its cloud computing services that might differentiate itself from its competition in the future. One example of it is Deepmind, the AI software that has shocked the world by beating Weiqi’s world number 1 player, Ke Jie.Deepmind has gone on to showcase its strength in many other games such as Chess and even Activision Blizzard’s (NASDAQ:ATVI) Starcraft 2. Secondly, its cloud gaming platform, Stadia, has just been launched. That could potentially start a whole new evolution in the gaming industry as we transition from console and PC gaming to streaming games directly from cloud servers.
Hardware Maybe after seeing the success of Apple Inc (NASDAQ:AAPL) in the hardware space, many US technology companies have since entered the hardware industry as well. Google has bought out the smartphone division of HTC Technology, which is the basis of its Pixel line of products at the moment. It has also acquired Nest a few years ago and its Nest range of products is at the heart of its digital home offering. Of course, hardware is a wildly competitive space, companies like Microsoft and Facebook have all been releasing new hardware products as well. Thus, it is still too early to know if Alphabet could make this as successful as Apple has done.
Is Alphabet Riskless?
Alphabet is far from riskless. I think the most direct risk now for any large technology company is the possibility of regulation. Personally, I am not that pessimistic about the future of these companies even if regulations will be implemented. This is because regulation could actually increased the barrier of entry for other newcomers to enter into the market and making these technology giants even more dominant. However, the uncertainty of what kind or form of regulation will be implemented has definitively increased the risk for Alphabet.
On top of that, as Alphabet has been investing into other areas of business and with the rise of social media and other advertising channels, the margins for Google has been decreasing over the years. Its operating margins have declined from 35% in 2009 to the current 28.6%. If competition or regulation increase, then these margins could continue to see a downward trend.
Lastly, although Alphabet is a public company, it is still basically being controlled by three guys. Due to its different voting classes of share, co-founders Larry Page & Sergey Brin and Chairman Eric Schmidt control 60% of the voting rights of the company. This means that the company is still very dependent on the three executives. Any conflict between them or if any one of them leaves or pass away, it could potentially create some challenges for the company.
Some Thoughts on Valuation
Alphabet Inc is now trading at about 28.7 times its earnings. That is slightly below its 5 year average of 34 times. However, for a company with such an impressive range of assets and potential of growth, I tend to focus less on the company’s valuation. To me, a high-quality and growing company like Alphabet could grow into its valuation over time. As we invest in a (high-quality) company longer and longer, we would realise that the valuation becomes less and less relevant.
Therefore, Alphabet Inc is surely one stock I will continue to hold for many more years to come.
#2: Microsoft Corporation (NASDAQ:MSFT)
The Future of Computing
In a Keynote speech during the Amazon Web Services (AWS) event in Las Vegas in December 2019, AWS CEO Andy Jassy called the shift to cloud computing is the “most titanic shift that we’ve seen in technology in our lifetime”. This is not just about how we save our digital photos but rather how companies store, process and use their data in the future.
In the past, no matter how small your company might be, you would need to keep tons of hard disks around to save all your company’s data. Companies would also need to build their own internal servers to ensure they have access to their data at all times.
Nowadays, companies are being built without any investment into computing infrastructure. Just buy a laptop or a smart device and you are off to the races. Why is this possible?
This is because all our computing infrastructure can be rented as a service now. This goes from hosting our website, running our social media, our inventory system, billing system, accounting system, word processing, presentation processing, team communication, team calendar and booking system, etc. Every single function in the new-age company can be rented as a service from a SaaS (Software-as-a-Service) company. And most of these SaaS companies would in return rent the space they need to run their business through cloud computing providers.
This is not only happening for small, medium enterprises (SME) but also to some of the largest companies around the world. More than 95% of the fortune 500 companies are customers of cloud computing providers.
However, every individual and company would be worried about how safe our data is if we never have a copy of them saved with us. This is not only about the security and integrity of our data from hackers but also from the company we are storing these data with.
Would these companies stay in business longer than our own business?
Would these companies turn around and use our data for their own gains?
Although there is little doubt about the first questions, there might be some doubt on question #2, especially for two of the main cloud providers in the market; Amazon Web Services and Google Cloud.
This is because Google’s business model is built on monetising data! So, there would be concerns on how Google might one day try to monetise these datas on its customers. On the other hand, Amazon is well-known for experimenting and incubating new business and products within the company. Many have accused Amazon on using data from its retail business to spot fast-growing brands and products, then turning around and creating a “home-brand” equivalent product at a much lower price to compete with retailers listing on its platforms.
The cloud infrastructure service provider is now dominated by three companies;
Amazon Inc (AMZN)
Microsoft Corporation (MSFT)
Alphabet Inc (GOOG)
Yet, from a customer’s point of view, Microsoft might be the safest provider to choose with if they are worried about any of the issues mentioned above. This is because Microsoft has always been a enterprise-focused company, and has always been serving corporate clients since the birth of the company. This means that Microsoft, at its core, is a business-to-business (B2B) type of company. It would be focusing on serving its enterprise customers and not constantly thinking about how to start new retail businesses or monetising data through advertising.
On top of that, through its existing relationship with corporate clients who are using their other services like Microsoft Office or Windows licencing, it could easily upsell its cloud services to the same clients by bundling it to its existing offering.
This would greatly increase the appeal for its cloud services, Azure. That might be one of the key reasons why Microsoft Azure has been outpacing the growth of AWS over the past few years. In the latest quarter, Azure grew 51% year on year, which is much faster than the industry growth.
More Bolt-On Growth and Capability
With the dominance of its cloud services, Microsoft has the ambition of building Azure into the world’s supercomputer. This means adding more capability into Azure to allow its customers to build more powerful applications on it. At this point, Microsoft has been acquiring many companies with such capability to add more features into Azure and better serve its customers.
Although its cloud services seem to have the largest growth potential going forward for Microsoft, all its business segments are still growing. Its Personal Computing segment grew about 9% year on year during the last quarter and its Productivity and Business Processes segment grew more than 25% over the same quarter.
Currently, the company is a three-legged stool, with each segment contributing about a third of its revenue, making Microsoft one of the most diversified technology companies in the industry.
Microsoft business segment:
Productivity and Business Process (Enterprise Services)
Data from ShareInvestor WebPro
At the moment, Microsoft Corporation is trading at 35.2 times its earnings. For a company that is generating a return of equity of 47% and having a net margin of more than 36.5%, I do find the valuation quite fair given our low-interest-ate environment. It is also slightly below its 5-year average valuation of 36 times its earnings. For a long-term compounder, I am quite happy to have Microsoft in my portfolio.
These are two companies that I have invested in over the past few years and are still as optimistic as ever about their future. That is why Alphabet Inc and Microsoft Corporation will be two stocks I am holding on to for the next decade.
To find out more about long term investment trends and companies, remember to register for Invest Fair by ShareInvestor. ShareInvestor is hosting its first virtual Invest Fair event on the 21st & 22nd of August. The two-day event will feature speakers and industry experts to bring across insights to WHERE and WHAT to invest in the current market. Join us in learning more about the investment themes for the next 10 years and hear deep insights from industry experts. The event will also include attractive cash prizes up to S$388! Register here now to get your e-goodie bag filled with research reports, such as “Top 5 Asset Management Funds and Their Current Holdings & “Investment Trends for the Next 10 Years” to kickstart your portfolio.