This dominant tech firm is one of the world’s elite companies.
Let’s not beat around the bush. As individual investors, our goal is to become wealthy one day. For each person, that exact dollar amount is different.
It makes sense that as we look at stocks to add to our portfolios, we might try to copy some of the wealthiest investors. Due to reporting requirements, billionaire hedge fund managers’ holdings are open for the public to see.
There’s one “Magnificent Seven” stock that is clearly popular among this elite crowd, as 11 of 16 top hedge-fund firms owned it (as of Dec. 31). Here are four reasons why Alphabet (GOOGL -2.40%) (GOOG -2.35%) is a no-brainer business to buy for your own portfolio.
1. Competitive strengths
Key reasons the gargantuan internet enterprise should be on your radar are its notable competitive strengths.
The first advantage Alphabet has is intangible: data. Thanks to Google Search, which has a 91% global market share, with 130 billion visitors to google.com in June, there might be no other company that collects as much data as Alphabet does. This makes it a clear leader in the digital ad industry. And it helps inform product-development efforts.
Alphabet also benefits from powerful network effects. Google Search is a three-sided ecosystem with users, websites, and advertisers all finding tremendous value thanks to its massive scale. Connecting content creators with viewers gives YouTube network effects as well.
2. Strong finances
The market loves a good growth story. Businesses that can rapidly increase their revenue are exciting. But they typically are in poor financial shape.
This is not the case here. Very few businesses are in better financial condition than Alphabet. As of June 30, the $13 billion of long-term debt on its balance sheet was more than offset by $101 billion in cash, cash equivalents, and marketable securities.
And the company appears to always operate from this position of strength. For one thing, it’s extremely profitable. Its second-quarter operating margin came in at a stellar 32%, and it has averaged 27% in the past five years. This helps drive incredible free cash flow, which management uses to repurchase shares and pay dividends.
3. Growth opportunities
Alphabet will continue to gain from three broad secular trends. I discussed above how it is a leader in digital advertising. As the world continues to be more tech-driven, with more internet users, the virtual real estate to sell and display ads will only expand, benefitting Alphabet.
Streaming entertainment is another growth engine, since it attracts households that decide to cut the cord. According to Nielsen, YouTube has commanded the most TV viewing time in the U.S. for the last 17 months.
And we can’t forget about cloud computing, a market estimated to be worth $2.4 trillion worldwide by 2030. Google Cloud saw its revenue rise 29% year over year in the second quarter, with $1.2 billion in operating income. With a heavy focus on artificial intelligence, this segment will allow Alphabet to be at the forefront of this technology.
4. A compelling valuation
With its stock soaring 194% in the past five years, the business carries a market cap of over $2 trillion today. But there’s still a buying opportunity.
Alphabet shares trade at a forward price-to-earnings ratio of 21.8. For such a dominant business with an economic moat, pristine financials, and growth potential, it looks like a no-brainer portfolio addition. Which might be exactly what those billionaire hedge fund managers think.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.