Google's data moat

3/3/22, 6:22 PM
Google Stock Is A Buy On Future Growth, Alphabet Data Moat | Seeking Alpha
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https://seekingalpha.com/article/4486660-google-data-moat-stock-strong-buy
Google: Using A Data Advantage To
Dominate Competitors
Star Investments
JHVEPhoto/iStock Editorial via Getty Images
In an era in which data has become the most valuable commodity,
companies that have become the most proficient in data collection, data
storage and data analytics are the ones that are responsible for the most
value creation in the current market. From the company's very inception,
the original Google gained a first mover advantage in the data economy by
developing proprietary data sets, creating new methods of organizing
data and developing sophisticated algorithms to analyze data. This first
mover data advantage has never really been relinquished since Google's
first search engine, BackRub, was invented in 1996.

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Most people still consider Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL)
as largely an advertising company but a better way to think of things is
that advertising is merely Google's first way to monetize a huge stockpile
of proprietary data and the company now known as Alphabet has a lot of
optionality to monetize many other high value proprietary data sets using
ways other than advertising in the future. Currently, however, the cash
flow being produced by the advertising business is funding a huge
amount of research into developing data in many other interesting areas
like Augmented Reality, Artificial Intelligence, and Blockchain.
What this means for today's investors is that not only does Alphabet
currently have strong revenue growth and cash flow but the company is
laying out the foundation for dominance in future businesses that have
strong potential for producing high cash flows. Investors should consider
buying Alphabet today for not only its existing high growth businesses but
also for the potential high value businesses in its development pipeline.
Alphabet Data Moats
There are some people that pooh-pooh the idea that data can give a
company a strong moat and there are legitimate reasons why some
people have come to that conclusion, with the biggest reason being that
there are so many companies that pursue data moats and fail. A big part
of the reason that many companies fail in building a data moat is that not
all data sets have the same enduring value. Some data sets have such
strong and lasting value that it is nearly impossible to breach the moat,
while other data sets either don't have much initial value at all or the value
of the data set does not last because the data is too easy for competitors
to also obtain. The strength of a data moat is almost directly proportional
to the value of the underlying data. Data that is very difficult to obtain and
is used in services in high demand, like Search, is an example of valuable
data that can be used to build a moat. Some start-ups make huge
mistakes when pursuing a data moat, only to discover later on that the

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data that they are collecting is either not valuable enough or is too easily
obtained by fast follower competitors to establish a data moat.
In addition, it often can be extremely difficult for a company to establish a
data moat because building one often takes a significant amount of time
and resources. Data moats also involve more than just simple data
collection. A data moat often involves a company having enough
sophisticated analytic capabilities to derive enough insights from the data
to be able to build increasingly better products. Usually, better products
will bring in more customers and more data to then be used to iterate,
improve and eventually produce even better products. Some people call
this process the Flywheel Effect because of the compounding nature of
using data to continually add improvements that increase both the value
of existing data and the end product. This process has been described by
Harvard Business Review as data-enabled learning.
The reason why Alphabet has built several powerful data moats is that the
company has become very proficient in identifying high value data,
collecting that data, analyzing that data for insights and producing high
value products based upon the insights gleaned from the data. The very
first high value data that the founders of the company, Sergey Brin and
Larry Page discovered was search data. Google established a first mover
advantage in search data that grew into such a powerful data moat that
even Microsoft (NASDAQ:MSFT) is unable to catch up to Google in
search. Google still maintains 92.47 percent market share in search as of
June 2021. Over time, Alphabet has discovered and built up other high
value data sets with some of the most well-known products built upon
those data sets being Maps, YouTube, Google Assistant and self-driving
cars (Waymo).
In 2022, we'll stay focused on evolving our knowledge and information
products, including Search, Maps and YouTube, to be even more
helpful. Investments in AI will be key, and we'll continue to make

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improvements to conversational interfaces like the Assistant.
Source: Sundar Pichai - Google Q4 2021 Earnings Call
Artificial Intelligence and Machine Learning
A large part of how Alphabet maintains its data moats is through the large
amount of R&D that the company puts into innovating and developing new
AI methods and algorithms. Alphabet has recently announced two new AI
products that are giving the company a significant edge in increasing the
value of its existing data sets.
The first new AI model that Alphabet introduced in May 2021 is named
Multitask Unified Model, or MUM, which will improve how Alphabet
conducts searches by being able to answer far more sophisticated
questions in up to 75 different languages, while also understanding
information across text and images. Google, in the future, plans to also
include the ability to understand video and audio in MUM. In the earnings
call, CEO Sundar Pichai mentioned that one example of MUM in use today
is that it is being used to improve searches for vaccine information. If
people want to see the difference in information MUM can produce just
type "Where can I get a COVID-19 vaccine?" into both Google and Bing.
These are the results from Google:

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Where can I get vaccine? Google (Google Search)
Here is the Bing search:

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Where to get vaccinated - Bing (Bing Search)
The big difference in the results is that Google will currently show exactly
on a map where vaccination sites are locally and Bing will only include a
link to State vaccine resources, where additional searches must be made
to find local vaccine sites.
If I ask "Where can I get a COVID-19 test?", an interesting thing happens.
Google again gives me a map showing ALL of the locations of where I can
get a COVID-19 test locally. The key word is ALL. If I ask the same
question of Bing, the Microsoft search engine does give me a few
locations on a map several miles from where I live but it is missing the
most important location. I literally am a stone's throw away from a COVID-
19 vaccine testing center, which fails to appear on the Bing map. The
location is fairly important too, since the testing location sits near and is
sponsored by a hospital So, even with as long as Microsoft has been
competing in search, Microsoft is still behind Google because either Bing
does not have as much data as Google or because Google continually ups

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the game on what its search algorithms can do.
The second innovation that Google has introduced is called Pathways,
which was announced at the end of October, 2021. When I first started
reading up on Artificial Intelligence, I learned that there are three forms of
AI:
Artificial Narrow Intelligence (ANI) - performs a single task extremely
well.
Artificial General Intelligence (AGI) - The ability to match human
intelligence in any intellectual task.
Artificial Super Intelligence (ASI) - The ability to surpass human
intelligence.
Of these three forms, humans have only succeeded at building ANI or
narrow intelligence. With Pathways, however, it appears that Google is
taking its first steps towards building an AGI:
Too often, machine learning systems overspecialize at individual tasks,
when they could excel at many. That’s why we’re building Pathways - a
new AI architecture that will handle many tasks at once, learn new
tasks quickly and reflect a better understanding of the world.
Source: Jeff Dean Google Senior Fellow and SVP, Google Research -
Blog
If Alphabet becomes a first mover in building out a competent AGI, then
the advantages that Alphabet would gain over competitors would likely be
significant. While the revenues and cash flows that Alphabet receives from
advertising are already significant, it pales in comparison to the types of
revenue streams that Alphabet could build if successful at building the
world's first AGI.
Alphabet Q4 2021 Earnings

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Alphabet advertising business showed reflected strength in advertising
spend by brands as the economy continued to rebound in Q4. Alphabet's
results were amazing, since other advertising-related companies like Meta
Platforms (NASDAQ:FB) and Twitter (NYSE:TWTR) did not fare as well in
their advertising business recently due to Apple's privacy changes.
Google Q4 2021 supplemental information
Alphabet Segment Revenues (Alphabet Q4 2021 Earnings Press Release)
As can be seen above, Google advertising revenue seemed barely
affected by Apple's IDFA changes and the likely reason for that is
Google's primary source of advertising revenues is Search, which targets
users based upon keyword bidding and not so much by tracking user
activity. What Apple's IDFA changes do is block the ability of an app like
Facebook or Twitter from tracking the user but that has little to no impact
on Search advertising, which is evidenced by Google Search's 36% YoY

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growth in Q4 to $43.3 billion. About 71% of Google's ad revenues come
from Search advertising revenue. Secondarily, Apple's IDFA changes don't
affect Google Maps or YouTube app as much either, as Google switched
to another Apple tool, called SKAdNetwork. Apple's IDFA changes do
affect Google Maps and YouTube on the edges some but because Google
was never as reliant on IDFA as much as many other ad-tech companies,
the Apple change has shown very little effect on Google's ad growth
numbers when compared to Facebook or Twitter.
Google's total advertising revenue was up 32% in Q4 to 61.2 billion. Ad
revenue makes up approximately 82% of Alphabet's $75 billion in
revenues reported in Q4. Alphabet currently monetizes its data
advantages that go into products like Search, Maps, Shopping, YouTube
and a few other services through advertising. The various Google
advertising revenue sources are lumped together as Google Services.
Google Services' cost of revenues or Traffic Acquisition Costs ("TAC")
were $13.4 billion, up 28%. An example of a Traffic Acquisition Costs is
when Google pays Apple to be the default search on Apple devices.
Google Services is the only segment showing an operating profit, which in
Q4 was approximately $26 billion, up 36% YoY. Google Services
Operating margin was 37%
Google also showed strong revenue growth from Google Cloud ("GCP")
which was up 45% to $5.5 billion which is faster than overall cloud growth
and faster than Amazon's (NASDAQ: AMZN) AWS, which grew revenues
40% to $17.78 billion. Unlike Search, GCP is not in a first mover position in
the cloud and Google is forced to invest significantly to compete in the
cloud. Google Cloud had an operating loss of $890 million.
While Cloud operating loss and operating margin improved in 2021, we
plan to continue to invest aggressively in Cloud given the sizable
market opportunity we see. We do remain focused on the longer-term
path to profitability and over time, operating loss and operating margin

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should benefit from increased scale.
Source: CFO Ruth Porat - Alphabet Q4 2021 Earnings Call
Other Bets, which mostly consists of revenues from Waymo, life sciences
unit Verily, biotech research unit Calico, and the moonshot factory named
X came in at $181 million, down from $196 million a year ago. The Q4 2021
operating loss was $1.45 billion versus an operating loss of $1.13 billion in
Q4 2020
Alphabet Q4 2021 Consolidated Income Statement Highlights
Alphabet Q4 2021 Earnings Release (Alphabet Q4 2021l Income Statement)
Both consolidated operating income and operating margin were up YoY in
both the Q4 and full year numbers, as can be seen above. Because
Alphabet has such tremendous operating leverage, it was able to raise
operating expenses 35% to $20.5 billion in Q4 and still have growth in
operating income. Fourth quarter R&D expenses were up 24%, mostly
due to headcount growth. Fourth quarter S&M was up 43%, mostly due to
increased spending on ads and promo for the 2021 holiday season versus
a reduction in such spending in the year of COVID-19 (2020). Fourth
quarter G&A rose 46%, mostly as a result of costs related to legal matters
and charity. The costs related to legal matters are probably both lawyer
costs and the numerous fines that Alphabet is receiving worldwide from

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regulators.
Expect Alphabet to continue investing heavily moving forward. Currently,
Alphabet is in the midst of a hiring spree that saw a 6,500 increase in head
count during Q4. Some of the areas Ruth Porat highlighted on the
earnings call where this increased investment in people is being spent are
in Augmented Reality ("AR"), Google Cloud, Maps, YouTube, Google Meet,
and web3. For those that are unaware, the term web3 essentially refers to
a new web version based on blockchain technology.
The consolidated revenue growth and EPS numbers that Alphabet is
putting up at a $1.8 trillion market cap is amazing. Consolidated Q4
revenues were $75.3 billion, up 32% or up 33% in constant currency. This
was a large beat over Wall Street analyst expectations of $72.17 billion.
Google Q4 2021 EPS was $30.69 that also produced a large beat of Wall
Street analyst expectations of $27.34. When these blowout numbers are
combined with the fact that Alphabet announced a 20-for-1 stock split,
investors sent the stock price up 7% the day after earnings were released.
Google has a strong balance sheet and ended 2021 with $140 billion in
cash and marketable securities. At the end of Q4, Google had $13.93
billion long-term debt on the balance sheet which was rated Aa2 by
Moody's. This rating is the third-highest long-term credit rating from
Moody's. Google Q4 free cash flow with $18.6 billion and FY2021 free
cash flow came in at $67 billion. Alphabet also repurchased $50 billion of
its shares in 2021.
Risks
Alphabet has become so dominant with its data moat that it is close to
being a juggernaut that can't be stopped. Google's moat is so strong that
Charlie Munger once said:
Google has a huge new moat. In fact, I've probably never seen such a

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wide moat.
Source: Charlie Munger
Right now, the biggest risk from Google comes from regulation by
governments around the world. Google is constantly getting fined billions
of dollars by the EU and other countries for violating a regulation.
Alphabet not only has to worry about governments around the world but
also State governments within the USA have also gotten into the act of
suing Alphabet.
Analyst Price Targets
Google Analyst Price Targets (Yahoo Finance)
The above is based on 39 Wall Street analysts offering 12-month price
targets for Alphabet in the last 3 months. The average price target is
$3456.54 with a high forecast of $3900.00 and a low forecast of
$2965.00. The average price target represents a 25% increase from the

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last price of $2772.40.
Valuation
Data by YCharts
YCharts definition of the PEG ratio is the PE ratio divided by the
company's growth rate. Google's valuation based upon a YCharts PEG
ratio definition is close to historical lows at .262. Generally, a PEG ratio
lower than 1 indicates a stock that is undervalued.

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Gurufocus PEG ratio (Gurufocus)
The way GuruFocus defines a PEG ratio is the PE Ratio without non-
recurring items divided by 5-Year EBITDA Growth Rate. Under GuruFocus'
definition, the PEG ratio is at .89, which is also close to historical lows.
Under the GuruFocus definition of PEG ratio, Google is also considered
undervalued.
Conclusion
Alphabet is probably one of the best stocks that an investor could choose
to invest in during the current rising interest rate environment. The
company significantly beat analyst estimates on both the top and bottom
line in the past quarter, the company is still generating strong revenue and
EPS growth, has a strong balance sheet, and is undervalued at current
prices. Additionally, Alphabet owns some of the most valuable proprietary
data sets on the market today and the company has the potential to
produce products that could eventually be as big or bigger than the
advertising business in the future. The only thing that I see that could
derail Alphabet's data advantages is government regulators from different
jurisdictions ganging up on the company. Alphabet is a buy for all
investors seeking growth without excessive risk.

Google's data moat

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