Alphabet (GOOG, Financial) (5.8% of Sequoia’s capital at year-end, -39% total stock return in 2022)
Alphabet’s share price declined significantly this year, and the business results were undeniably mixed. For full- year 2022, revenues are expected to be up approximately 10%, whereas EPS is expected to be down approximately 16%. However, when the business results are viewed over the past few years, the picture is anything but mixed. Versus 2019, Alphabet’s revenues and EPS are expected to have compounded at annual rates of approximately 21% and 24%, respectively. This is a substantially bigger business than it was going into the pandemic.
As we all know, Google remains synonymous with search. Search advertising continues to grow at a double-digit rate, driven by ongoing ecommerce penetration. The moats around Alphabet’s core business are wide and numerous. They include Google Chrome, which has a roughly 65% share in browsers; Android, which has a roughly 75% share in smartphones; and a variety of products and services – including Gmail, Maps, Chromebooks, Google Docs, and more – that tie users into the company’s ecosystem.
Adjacent businesses YouTube and Google Cloud continue to grow and have substantial room to improve their margins.
Other ventures like Waymo, Nest and Verily remain early stage, but boast strong technical foundations.
Running through Alphabet’s various businesses are best-in-class capabilities around distributed hyperscale computing, advertising targeting technology, and artificial intelligence. Almost all of Alphabet’s products and services have already been suffused with artificial intelligence to some extent, and we believe the company’s efforts here will come increasingly to the fore in 2023 and beyond.
The most obvious risk facing Alphabet is regulation. Regulators and legislators across the globe continue to scrutinize Alphabet’s business practices as well as those of other large technology companies. We take it as a given that Alphabet will be forced to pay fines and to alter its business practices in various ways that could adversely impact revenues and profits. But it’s important to maintain perspective: regulators are taking an active stance precisely because Alphabet’s business is exceptionally powerful and well protected.
At the current share price, Alphabet trades for approximately 18x expected EPS for 2023. We consider this an attractive price for a globally dominant business capable of compounding EPS at a double-digit rate over the next several years.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund fourth-quarter 2022 letter.
