As the Founders Depart, There’s a Real Opportunity in Alphabet Stock

Without a doubt, Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) has become one of the most successful conglomerates in history. Founded only 21 years ago, Alphabet has grown into the third-largest publicly-traded company, bringing tremendous long-term profits to Alphabet stock.

As the Founders Depart, There's a Real Opportunity in Alphabet Stock

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Alphabet also encompasses multiple businesses. Most reside under the original Google umbrella. It also consists of various firms such as self-driving car company Waymo, life sciences company Verily, YouTube, and numerous others.

Although this has brought multiple successes, it has also locked up hundreds of billions worth of its value. Perhaps with the founders taking a step back, Alphabet stock can surge much higher simply by bringing more of its intrinsic value to the forefront.

Leadership Changes and Tech Conglomerates

As with Microsoft (NASDAQ:MSFT) a few years ago, and Alibaba (NYSE:BABA) more recently, Alphabet will head into the future without the leadership of its founders. Larry Page and Sergey Brin have stepped away from the mega-tech company they started from scratch in 1998. Now, Sindar Pichai, who became CEO in 2015, assumes full control of the company.

However, this question becomes more critical since Alphabet has become a conglomerate. As seen with the dramatic decline of GE (NYSE:GE) and the voluntary breakup of United Technologies (NYSE:UTX), older conglomerates continue to move away from that business model.

One other problem with conglomerates is the difficulty in handing them off to a successor. Nowhere was this problem more evident than at GE, where apparently only Jack Welch could hold the conglomerate he built together. Pichai has prepared for this moment for four years. Hence, I do not foresee the same kind of disaster brought about by GE’s leadership change 18 years ago.

Alphabet May Unlock More Value

However, I wonder if Pichai will follow the anti-conglomerate trend of his industrialist brethren. I have frequently criticized Alphabet for this conglomerate stature. To be sure, Alphabet has become a prolific innovator under its founders. However, if Page and Brin deserve criticism, it is for a failure to unlock the full value of these creations.

As of the time of this writing, Alphabet stock supports a $910 billion company. Ads made up 83.7% of revenue in the last quarter. Admittedly, the company faces increased competition in this area from Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN). Hence, it needs to hold on to some of its inventions to create new revenue sources.

However, as I mentioned before, this arrangement means that the price of GOOGL stock does not fully reflect the value of Waymo at $175 billion. One has to wonder how much other Alphabet businesses suffer from this same undervaluation. Perhaps with the founders wielding less influence, Alphabet stock can benefit by unlocking some of this value.

They can also realize more value by paying a dividend. Total cash on hand now stands at $121.18 billion. At around $1,320 per share, GOOG stock has now reached record highs. However, Alphabet stock traded in a range over the previous 18 months. Also, today’s current price is only slightly higher than the peak of around $1,297 per share that it saw last April. A payout would open GOOGL to a new class of income-focused investors, likely driving the price much higher.

For these reasons, I see Page and Brin’s departure as an opportunity. This holds even more true if they built a company that only they could manage. By spinning off some of its divisions and paying a dividend, investors will not only have more stock value but likely more cash in their pockets as well.

Final Thoughts on Alphabet Stock

The new leadership of Alphabet could finally unlock some of the unrealized potential created by its founders. Without question, Alphabet has become one of the most successful companies in American history. This has generated tremendous value for holders.

However, despite its numerous inventions and businesses, ad revenue continues to serve as the main drive of Google stock. Moreover, shareholders have likely missed out on ever-larger gains that could have come from business spinoffs and dividend payments.

Handing over control to Mr. Pichai could remedy some of these situations. Not only could this further enrich holders of Alphabet stock. In much the same way that Bill Gates has become wealthier under new Microsoft leadership, it could make Mr. Brin and Mr. Page more prosperous than ever as they move on to other pursuits. 

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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