Here is a question to consider. With competition growing for Google, what will happen to shares in its parent company Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) in 2023? Now, here is a second question to ponder: will Alphabet stock be worth less or more a decade from now than the price at which I can buy it today?
Right now, Alphabet has a market capitalisation of over a trillion dollars. However, I think a decade from now it could be worth even more. That is why, if I had spare cash to invest today, I would put some Alphabet stock in my portfolio and keep it there for the foreseeable future.
Long-term investment horizons
I do see some risks for Alphabet in coming months and years. From the rise of competitors like TikTok to a downturn in advertising spend worldwide due to the recession, there are threats to both revenues and profits at Alphabet.
That is already evident in the business. In the third quarter, revenues grew 6% compared to the same period the prior year. Although that is positive, it is a marked slowdown compared to the 41% equivalent reported 12 months previously. Meanwhile, net income fell 24% in the third quarter compared to the same period last year.
But as a believer in long-term investing, I am looking beyond the short-term challenges to Alphabet and considering what its prospects look like over a much longer timeframe. That is what excites me about this investing opportunity.
Money machine
If you were a business school student trying to design a strong commercial model, you might come up with something that looks like Alphabet.
The company’s products and services are embedded in the daily lives of vast numbers of users. The more they use them, the less appealing it may be for them to invest the time and effort to switch to a competitor.
Developing services can be expensive, putting off new market entrants. But for a company that has already developed its service — like Alphabet — the marginal cost of serving new users is small. Meanwhile, as it expands its user base, Alphabet’s commercial proposition becomes even more appealing for its advertising customers. That means that, as it gets bigger, Alphabet’s profit margins could keep growing.
Last year that business model generated $76bn in net income. That is just under one and a half billion dollars every week on average. With more and more people spending increasing time online in years to come, I think the market opportunity for Alphabet’s outstanding business model is set to increase.
I’d buy and hold Alphabet stock
That is why I would be happy to buy Alphabet stock now and hold it for 10 years or more.
After losing 36% of its value in the past year, the shares are trading on a price-to-earnings ratio in the teens.
I do see risks to the company and expect more will emerge in future, as the company has a lucrative business that competitors would be keen to attack. But I also think the powerful business model Alphabet has built means that it can continue to be a money-making machine on a grand scale for a long time to come.
