Google can be very helpful when you want to search for things. But parent company Alphabet (NASDAQ: GOOG) has not been much help for investors searching for good returns lately. Over the past year, Alphabet shares have lost 25% of their value.
I think they offer great value for my portfolio though, and would consider buying them now if I had spare money to invest. Here is why.
Long-term investing
I am not a short-term trader trying to predict swings in market prices. Instead, I am a believer in long-term investing. I aim to buy small stakes in great companies I think have outstanding business prospects over the course of years or even decades.
The benefit of such a long-term approach is not just that it can take time for investors to fully appreciate the potential of a company. Rather, it reflects the fact that a great business model can get even better over time, thanks to economies of scale.
For example, building the digital architecture for a service like Alphabet’s YouTube takes significant resources. But once it is up and running, the marginal cost of adding new users is small relative to the potential rewards.
In the same way, if YouTube decides to extend five second adverts to 10 seconds, what would happen? Some users might leave, but I reckon many of them would keep watching – and the platform could earn a lot more from the adverts than before.
The shares and the value of a moat
As I said, it is the long-term potential of the Alphabet business model that attracts me. Billionaire investor Warren Buffett talks about the advantage of a business having a moat. By that he means a competitive advantage that can help give it pricing power. YouTube demonstrates this perfectly, just as the core Google service does. An installed base of users the business understands well and who know how to use its products is a massive business asset.
Alphabet works to keep them through everything from thoughtful interface design to technical reliability. But key to its business prospects is the fact that it enjoys a massive moat. Indeed, Buffett has publicly said he made a mistake by not investing in Alphabet, even though he saw the potential in the business. “We blew it” he has told shareholders in Berkshire Hathaway.
Why I see value
If the business is as good as I think though, why have Alphabet shares been falling?
Partly it reflects some of the challenges the business faces. For example, as many countries face a recession, companies may cut back their advertising budgets. That could hurt sales and profits at Alphabet, for whom advertising is a key source of revenue.
But in the long term, I see Alphabet as a company whose technology, user base and brands give it an outstanding business moat. I think that could help it produce very strong earnings long into the future.
On that basis, I think the current price-to-earnings ratio of 19 might offer me excellent value as a long-term investor.
