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3 Things About Alphabet That Smart Investors Know

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google, is one of the most closely followed tech companies in the world. Most people likely know the company owns the world’s most popular search engine, mobile operating system (Android), web browser (Chrome), webmail service (Gmail), and streaming video platform (YouTube).

They probably also know it generates most of its revenue from Google’s ads, and it shares a near duopoly in the digital advertising market with Meta Platforms in the U.S. and many other major markets. Based on those strengths, many investors consider Alphabet to be a reliable long-term investment that can bounce back from any major economic downturns.

Image source: Getty Images.

However, Alphabet is also a complex company with a lot of moving parts. So today, let’s dive into three lesser-known facts about the tech giant — and why they could matter to smart long-term investors.

1. Its previous stock split was controversial

Alphabet will execute a 20-for-1 stock split on July 15. This split might generate some fresh interest from smaller retail investors and options traders, since each options contract is tethered to 100 shares, and potentially lead to its inclusion in the price-weighted Dow Jones Industrial Average. But for most long-term investors, the stock split is meaningless — since its market cap, valuations, and ownership will stay the same.

However, Alphabet’s previous stock split in 2014, when the company was still known as Google, was more controversial. That split separated Google’s stock into three classes of A, B, and C shares.

The Class A shares, which now trade under the GOOGL ticker, granted investors a single vote per share. The Class B shares were worth 10 votes apiece, but they weren’t publicly traded and only reserved for the company’s founders and top insiders. The Class C shares, which now trade under the GOOG ticker, were carved off from its Class A shares in a 2-for-1 split and included no voting rights. 

In other words, Google’s confusing stock split guaranteed that any activist moves against the company would fail without the backing of a major Class B shareholder. Alphabet’s founders Sergey Brin and Larry Page still control 51% of Alphabet’s voting power through their Class B shares, so they could technically challenge or overturn any major decisions made by CEO Sundar Pichai.

2. Google is just one of Alphabet’s subsidiaries

Google and Alphabet are often discussed interchangeably, since Google accounts for most of Alphabet’s revenue, but the former is actually just one of the latter’s many subsidiaries.

Alphabet’s other subsidiaries include its autonomous driving company Waymo, the drone developer Wing, the life science companies Calico and Verily, the AI companies DeepMind and Isomorphic Labs, and its secretive X Development subsidiary for experimental projects. It also operates Google Fiber, which provides broadband fiber connections in select markets, as well as two investment firms.

These barriers were established upon the creation of Alphabet in 2015 and more clearly separate the company’s loss-leading experiments from Google’s core businesses.

Alphabet bundles those businesses together in its “other bets” segment, which grew its revenue 15% to $753 million — just 0.3% of its top line — in 2021. However, the segment’s operating loss also widened from $4.5 billion to $5.3 billion — compared to its total operating income of $78.7 billion — and will likely remain a dead weight on Alphabet’s operating margins for the foreseeable future.

3. Google Cloud is still operating at a loss

Speaking of unprofitable businesses, Google Cloud also continues to bleed red ink as it chases Amazon Web Services (AWS) and Microsoft Azure in the cloud infrastructure platform market.

Google Cloud claimed 8% of that market in the first quarter of 2022, according to Canalys, putting it in third place behind AWS (33%) and Azure (21%). Out of the big three, only AWS is profitable.

Google Cloud’s revenue rose 47% to $19.2 billion, or 7% of Alphabet’s top line, in 2021. That means it’s growing faster than AWS and at a comparable rate as Azure. The segment’s operating loss narrowed from $3.1 billion to $5.6 billion, but it will likely remain deeply unprofitable as Google tries to gain more customers with steep discounts and aggressive promotions.

Why should these facts matter to investors?

These three lesser-known facts shouldn’t make Alphabet a less appealing investment for long-term investors. I personally own shares of Alphabet, and I won’t sell my stake anytime soon because I believe the company has plenty of room to expand its sprawling ecosystem over the next few decades.

However, investors should realize that Alphabet’s ownership structure still puts it firmly in control of its founders and insiders and that its unprofitable “other bets” and cloud divisions could significantly throttle its earnings growth if Google’s advertising business stalls out during a recession.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Alphabet (A shares), Amazon, and Meta Platforms, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., and Microsoft. The Motley Fool has a disclosure policy.

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