Alphabet Inc (NASDAQ:GOOG) R&D Sets Up Shareholders for the Long Term

June 6, 2016

Portfolio Manager Sean Gavin of Fidelity Management & Research Company says Alphabet Inc (NASDAQ:GOOG) not only has a high-quality core search business, but is setting up shareholders for the long term by investing in R&D.

One of my biggest holdings today is Google, or so-called Alphabet now. I would say that this is one of the highest-quality business models I’ve ever seen in my years of investing. In fact, I think their core search business might be the best business I’ve ever seen.

[…] Everyone sees it as a search site or site where you go to get answers. But I think what they miss on that is exactly how self-reinforcing their business is. It’s an advertising model that is reinforcing because people go there because they want to be advertised to — as opposed to when you’re walking on the street, and you’re being inundated with ads, or if you’re watching something on TV, you are essentially paying by watching an advertisement to get this content.

When you go to Google, it’s one of those beautiful, self-reinforcing mechanisms. You’re going there to get advertised to. You’re going there to get an answer […]

The return on capital for that business is absolutely phenomenal. Google also has an unbelievable balance sheet with lots of cash. The business is generating a lot of cash every single quarter. And on top of it, you have an amazing R&D facility that you’re paying for as a shareholder but not getting returns from currently. With that, you are get optionality in the future if they were to be successful in Google Health or in self-driving cars or in Google Fiber. These are all things that could be very additive to shareholder value over the long term that you are not really paying for right now.

Sean Gavin