As a long-term investor, I am always on the lookout for shares I could buy with no plan to sell. Right now, one company that excites me is Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). If I had spare cash, I would load up on Alphabet stock now for my portfolio — and plan to keep it for the long haul. Here is why.
What makes a great investment
Different people have their own ideas on what makes a good investment. Like billionaire investor Warren Buffett, I try to find great companies selling at what I think is an attractive price.
I think Alphabet stock matches those search criteria right now.
Alphabet has a compelling business model
From a business perspective, what I think makes Alphabet a great company is its business model.
Once it builds its tech services – admittedly an expensive effort – the additional cost of servicing new users is marginal. On some services like YouTube, there is a network effect. In other words, the more users they attract, the easier it is to bring in even more.
The company’s large base of active users is somewhat tied in to the service, due to the time and effort they have invested in it. They could use a rival, but it would mean having to start from scratch again by learning a new interface and, for example, uploading content afresh. On top of that, Alphabet’s technical ease of use is one reason it has been so successful at building its customer base.
The company is able to monetise that excellent business model in different ways. It sells advertising, a hugely profitable activity. I also think it will be able to generate growing revenues in future by charging users for services.
But there are risks…
However, there are risks for Alphabet. Its vast staffing costs – over $13bn last year in general and administrative costs alone – could be a drag on profits at a time when advertising revenues are falling across the tech industry. Alphabet’s leadership plans to reduce costs, but that always brings a risk of hurting revenues too.
There are also bigger risks to Alphabet, aside from current economic and advertising woes. Its sheer size and success means it will likely face ongoing scrutiny from regulators. That could lead to it paying fines or needing to sell some of its business in future. Several decades ago though, Microsoft faced similar scrutiny. It is still thriving, despite paying large fines back then.
I see value in the stock
Even considering risks, I think Alphabet matches the first thing I look for when buying shares for my portfolio – a great business.
But what about the second element — an attractive valuation? Over the past year, the Alphabet share price has fallen a third.
Alphabet trades on a price-to-earnings ratio of 20. That is not cheap but I think it is reasonable for such a great company.
Earnings may fall. Net income in the most recent quarter was 27% lower than the same period last year. But I expect the strong business model to power long-term earnings growth. If I had spare cash to invest at the moment, I would spend it on Alphabet stock for my portfolio.
