Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) begins the new year ready to make an impression. Google Assistant’s debut at the CES show in Las Vegas has dazzled the media and further enhances Alphabet’s image as a top technology company. Still, for holders of GOOGL stock, the company’s most important growth driver remains its advertising platform.
Alphabet’s media focus lie with its AI and VR products
At CES, Alphabet made it clear it was not surrendering to Amazon.com, Inc. (NASDAQ:AMZN) on artificial intelligence (AI). Alphabet released Google Assistant, a direct competitor to the Amazon Echo. They made a bigger impression by not only enabling Assistant at CES but all over the city of Las Vegas.
With a 68% market share, the Echo currently dominates this market in smart speakers. Alphabet intends to change that. Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) have also compete in this area.
Alphabet also wants to lead in the field of virtual reality (VR). One device to help with that has been the release of an updated Google Pixel phone. GOOGL released the Pixel 2 phone last year. This month, they began offering an unlocked version and made it available on all carriers.
Google has also partnered with Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) with its Mirage Solo VR headset. The headset will run Google Daydream, Alphabet’s VR software platform.
The company is playing catch up in this area. Facebook Inc (NASDAQ:FB) with their Oculus Rift VR headset and Playstation VR from Sony Corp (ADR) (NYSE:SNE) are popular headsets that have already hit the market.
Still, Ads Remain Alphabet’s Core Product Offering
Despite these innovations, Alphabet derives almost 90% of its revenue from ad sales. Most of the ads are linked to its popular search engine through Google AdWords.
When one conducts a Google search, the algorithm chooses both results and ads they believe will appeal to the customer. This model has proven to be successful enough to generate most of the $110 billion in revenue Alphabet earned in 2017.
Its YouTube platform has been utilized as an ad platform as well. It operates as the video version of Google AdWords. Also, it introduced a pay service called YouTube Red. Red will allow customers to watch videos ad-free as well as add original content similar to Netflix, Inc. (NASDAQ:NFLX).
For all of the hype about Google Assistant or Google Daydream, these releases amount to publicity stunts compared to the importance of its ad platform. How these products do on the market will be anyone’s guess.
They may carve out for themselves a large share of Alphabet’s revenue in future years. Or they may be monetized for ad revenue like Alphabet’s older products.
GOOGL Stock Maintains a Fair Valuationm
This dependence on ads helps Alphabet maintain a strong position in the market. Unlike the Microsoft of a few years ago, GOOGL does not currently need new products to remain relevant in the marketplace. However, the fact that they are embracing the future shows Alphabet will probably remain relevant for decades to come.
Despite falling behind Amazon in one non-core area of the business, thinking of Alphabet as a company that’s behind the curve remains difficult. GOOGL stock trades close to an all-time high. It has risen 37% since touching a low last February. Despite this increase, the stock trades at 37 times current earnings, with its forward price-to-earnings (PE) ratio at 27.
This compares well to Amazon which trades at nearly 320 times earnings. Even with 15% average profit growth over the last five years, a PE of 37 hardly ranks as bubble territory. Outside of China, where Google is blocked in favor of Baidu Inc (ADR) (NASDAQ:BIDU), Alphabet products reach almost everyone.
Concluding Thoughts on GOOGL Stock
While the coverage for GOOGL stock currently focuses on Google Assistant and other recent gadgets, ad sales remain the core product for Alphabet Inc. The launch of Assistant thrilled many investors and showed it could compete with Amazon.
Alphabet has also shown its tech prowess with VR, partnering with Lenovo to take on the likes of Facebook and Sony in the virtual reality field.
However, despite all of the focus on non-core products, ad sales still make up 90% of Alphabet’s revenue. As the company looks for ways to monetize YouTube and other platforms, analysts expect ads to remain the core product offering.
While GOOGL stock has achieved a fair valuation, it still trades at a discount to other tech companies. And best of all for owners of GOOGL stock, most revenues depend on ads, not on gadgets.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
