Fund manager Terry Smith is often called ‘Britain’s Warren Buffett’ and it’s easy to see why. Since he launched his flagship fund, Fundsmith Equity, in late 2010, he’s generated enormous returns for investors.
Recently, Smith added a new stock to his fund. That was technology giant Alphabet (NASDAQ: GOOG), which owns Google and YouTube. I see this as a great move from Smith as I view the Big Tech stock as a bit of a ‘no-brainer’. Here’s a look at why I recently bought Alphabet shares and would buy more for my portfolio today.
Incredible growth
Alphabet’s latest results, posted last week, show that the company is generating huge growth. For the final quarter of 2021, revenue came in at $75.3bn, up 32% year-on-year. Meanwhile, earnings per share amounted to $30.60, up 38% year-on-year. These are incredible numbers for a company of Alphabet’s size ($1.8trn).
Digging into the Q4 results, it’s clear Alphabet has a number of growth drivers. For starters, it’s seeing excellent growth in its Google Search segment, where it makes money from digital advertising. Here, revenue was up 36% year-on-year to $43.3bn.
Secondly, it’s seeing strong growth from YouTube. Here, advertising revenues were up 25% on Q4 2020 to $8.6bn. That’s higher than Netflix’s revenues last quarter.
Third, it’s seeing prolific growth in its cloud computing division. Here, revenue was up 45% year-on-year for the quarter to $5.5bn.
Overall, the company’s growth is very impressive, in my view.
Poised to benefit from the tech revolution
Looking ahead, I think there’s plenty of growth to come from Alphabet. In the near term, the company could get a boost from travel-related advertising as the travel industry picks up after Covid-19.
Meanwhile, in the long run, Alphabet could be a major player in the artificial intelligence (AI) space. Last year, its DeepMind division launched a new venture that uses AI for drug discovery. It could also be a major player in the self-driving car space through its autonomous vehicle division Waymo.
Putting this all together, the future looks very exciting for Alphabet and its investors.
Attractive valuation
It’s not just the growth potential that I like here though. I also see a lot of appeal in the stock’s valuation. At present, Alphabet trades on a price-to-earnings (P/E) ratio of about 24. That strikes me as a very reasonable valuation given the company’s dominance in search, and its incredible level of growth.
Of course, there are risks to consider here. One is regulatory intervention. Given Alphabet’s dominance, I wouldn’t be surprised if regulators tried to break the company up. This could impact its share price in the near term.
Another is competition from other tech companies. In its cloud computing division, it’s facing intense rivalry from the likes of Amazon and Microsoft.
Overall however, I see a lot of appeal in Alphabet shares. And I see the fact that Terry Smith has bought the stock as very encouraging.
