I’ve been saying for some time now that Wall Street and the mainstream media need to take a decidedly different view of Google Inc. (Nasdaq: GOOGL).
In fact, back on Jan. 20, I made that exact point when I appeared as a guest on the popular show “Varney & Co.” on FOX Business.
Specifically, I said that the senior leaders at Google were looking to build the “conglomerate of the future” – separating, for example, search, life extension, and self-driving cars all into separate “silos” – and that they saw famed investor Warren Buffett as their “guru” for this model.
Buffett, of course, is the mastermind behind Berkshire Hathaway Inc. (NYSE: BRK.A), a sprawling, decentralized concern with holdings in insurance, railways, food, and much more. Berkshire has returned 2,767% to its shareholders in the last 25 years.[ad#Google Adsense 336×280-IA]Not a bad model to follow…
Turns out, my analysis of Google’s intentions and its role model were more accurate than even I realized at the time.
With the market tumbling this week, more than ever, we need to be on the hunt for quality stocks – ones that can beat this sideways market.
And now that Google has announced a new corporate structure, complete with a new name, it’s poised to crush the market over at least the next three years.
Today I’ll show you how to play it…
Taking Profits Will Be as Easy as A B C
Back when I discussed Google with host Stuart Varney in January, I said the stock was a great play for investors who could afford to take the long view.
I said it would take about a year for what I saw going on behind the scenes to begin to pay off for shareholders. This is one time, I’m happy to be wrong.
Since then, the stock is up 30.8%, beating the S&P 500 Index by more than 2,000% over the period.
To me, just the stock’s performance (most of it over just the last month) means that Google meets the mandate of Rule No. 2 of my five-part system for building tech wealth. That rules says to “separate the signal from the noise.”
Making money in tech stocks means you have to avoid not only hype from the company, but also the noise you hear from Wall Street. Remember, until very recently, the Street has been down on Google, saying the firm invests too heavily in futuristic tech.
Shows you how much Wall Street knows…
Instead of putting Google’s work on longevity, self-driving cars, and other futuristic tech in the shadows, the new corporate structure unveiled last week practically puts it on display.
And so far, it’s been nothing but good for investors.
To unlock the value hidden inside the leader in web search and related technology, Google’s leaders have created a new parent company called Alphabet Inc.
The idea is to separate out the company’s massive web search and advertising business from its investments in what are often referred to as “moon shots.”
Google said Alphabet will act as a holding company for its growing list of non-web businesses. These subsidiaries include everything from Boston Dynamics (robots) and Calico (human longevity) to X (cutting-edge stuff, like drone delivery) and Nest (smart home).
Just to give you a flavor of what we’re talking about here, consider that Google recently struck a deal with the National Aeronautics and Space Administration (NASA) under which it will lease a Silicon Valley tract for the next 60 years at a cost of $1 billion. The company said it will use the space for R&D in aviation, space exploration, robotics, and “other emerging technologies.”
Co-founders Larry Page and Sergey Brin will run Alphabet, which makes perfect sense, because these guys love the futuristic stuff.
Under the new structure, each Alphabet subsidiary will have its own CEO reporting to Page. That’s pretty much how Buffett does things at Berkshire Hathaway, a company Page now openly says is his model for running a modern conglomerate.
Page and Brin will be joined in running Alphabet by new Chief Financial Officer Ruth Porat. You may recall from our July 31 conversation that Porat has convinced Wall Street that Google can be what I’ve called “an ETF on the future” but still deliver strong cash flow and profits right now, today.
After the company recently beat on second-quarter earnings, Porat emerged as a star who could keep the company focused on the bottom line. Her performance in a conference call with analysts was one of the reasons your Google stock jumped a stunning 16% on July 17.
Meet Sundar Pichai
Meantime, there’s another senior exec you need to know about. His name is Sundar Pichai, and he will be the CEO of Alphabet’s Google subsidiary.
That unit will house the company’s high-margin search business, its YouTube video outfit, and the Android and Chrome operations. Those businesses brought in most of Google’s $66 billion in 2014 sales, with advertising accounting for 89% of the total.
The Alphabet announcement marked the first time that most investors had ever heard of Pichai, even though he had been running this part of Google for nearly a year.
That’s largely because the rising star is considered very low key. The youthful looking 43-year-old was raised in Chennai, in South India, and attended the legendary Indian Institute of Technology.
He came to the United States in 1993 to obtain a graduate degree in engineering at Stanford University. He also holds an MBA from the Wharton School of the University of Pennsylvania.
Pichai has a reputation for getting results on high-profile projects. Take his management of the Chrome web browser. Back in 2009, it had a scant 1% market share, according to the web traffic analysts at StatCounter. Today, Chrome commands 45% of browser use.
Along the way, he has not just steadily climbed Google’s ranks, but Pichai has become more of a public face for the company. For each of the last two years, he has presided over the firm’s annual developer conference, which draws thousands of people who write apps for Google’s tech ecosystem.
News of the restructuring comes less than a month after Google reported excellent second-quarter results. Sales rose 11% from the year-ago quarter to $17.7 billion. Earnings per share rose nearly 32%, meaning this is a company with high operating margins.
For a behemoth like Google, those are some very tasty numbers.
Like I said in our July 31 conversation, “you’d be hard pressed to find a company investing more heavily in turning itself into the high-tech conglomerate of the future.”
With its strong recent earnings and its corporate restructuring underway, Google is set up to beat the market over the next three years.
That’s based on its three-year average earnings growth of 12%, meaning profits are doubling roughly every six years.
That means this “Berkshire Hathaway of the Internet (and the Future)” is the kind of foundational stock you can count on for the long haul – even in today’s sinking market.
It’s precisely the kind of investment I mean when I say, “The road to wealth is paved with tech.”
— Michael A. Robinson[ad#IPM-article]
Source: Money Morning