The ABCs of Google’s Alphabet (GOOG, GOOGL)

Since its humble roots took hold in September 1998, Google (GOOGGOOGL) has become synonymous with Internet search. In fact, the company’s name is so entwined with the action that it has actually become our culture’s preferred verb for searching — to Google.

googl-goog-google-alphabetWe no longer search for the answers to our questions on the web, we simply Google them.

While the company has maintained its status as the dominant search engine, Google has grown over the years (and split its stock, bringing GOOGL into the mix) to dip its toes into countless other areas of innovation, including: drones, driverless cars, venture capital, pharmaceuticals and so much more.

Many investors have concerns about the company’s broadening reach and ultimate payoffs, but an announcement last week seems to show that Google executives are finally listening to their investors.

Enter: Alphabet

On Aug. 10, Google introduced Alphabet.

It’s a new operating structure, and over the next few months, Alphabet will be created to operate as a parent company of Google and its many counterparts.

Google will be Alphabet’s largest company and will be solely focused on its Internet businesses, such as Android, YouTube, Maps and Search and ads.

Some of the smaller companies that will be broken out separately under Alphabet, include: Calico, Google X, Fiber, Google Ventures, Google Capital and Nest. Each will maintain their original function.

The main point of this new structure is to give each separate Alphabet company more independence, allowing them the freedom to develop their brands without the looming shadow of Google, and to take on more risk with less impact on the company as a whole. It is also in response to investor concerns that the company was wasting too much time and energy on businesses that may never come to fruition.

Each of the Alphabet companies will maintain their current leadership, although Google will take on a new CEO. As Google co-founders Larry Page and Sergey Brin move over to run Alphabet, current Product Chief Sundar Pichai will take over as CEO of Google.

Once the creation of Alphabet is complete, it will continue to trade under the GOOGL and GOOG ticker symbols on the Nasdaq. The move is expected to be finalized over the next couple of months.

News of the announcement caused GOOGL to pop; climbing more than 6% to a near-term high of $704 on Aug. 12, just two days after the news hit the Street.

Bottom Line on Alphabet

I believe the GOOG’s surge is a result of growth investors hoping that the new parent company will allow each of Google’s businesses to be valued on an individual basis.

At this point in time, Alphabet has noted that Google will be the only company reported separately, while the rest of the businesses will be reported as one. Even so, many investors are willing to take the chance that there may ultimately be separate financial statements for each company, and that more information to value the parts will help better value the whole.

Even with GOOGL already up more than 20% so far this year, I have a hard time believing that the stock will fail to continue its outperformance between now and the beginning of 2016.

Plus, I expect the continued cost-cutting measures at the company to help boost both growth and the stock’s performance going forward.

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