Observing Alphabet's Evolution: Similarities with the Legendary IBM Emerging?
Blue Chip Titan under Threat? 🌟 (GOOG -0.27%, GOOGL -0.28%)
Google's parent company, Alphabet, has been a reliable heavyweight in the tech sector. With ownership over the globe's no.1 search engine Google, the dominant web browser Chrome, Android (the largest mobile operating system), and YouTube (the premier streaming video platform boasting over 2.7 billion monthly active users), Alphabet has established itself as a formidable force. Its diverse range of market-leading cloud services further solidifies its position.
Over the past decade, the company's stock rose an impressive 480% as its digital advertising and cloud businesses flourished. From 2014 to 2024, Alphabet's revenue grew at a staggering compound annual growth rate (CAGR) of 18%, while its EPS increased at a CAGR of 23%.
However, Alphabet's crown jewels now face significant hurdles. Its core advertising business, accounting for 76% of its revenue in 2024, confronts three existential threats. Firstly, generative AI platforms like ChatGPT are revolutionizing information access methods and may undermine Google's search engine and targeted ads. Secondly, short video platforms such as TikTok and Meta Platforms' Reels are luring advertisers and viewers away from YouTube's lengthier videos. Lastly, US antitrust regulators are pushing Alphabet to offload Chrome or Android.
As some investors ponder whether Alphabet will follow the downward spiral of its predecessor IBM, it's essential to consider the differences between the two tech titans.
IBM's Trials and Tribulations
IBM ruled the personal computing realm in the 1980s and early 1990s but didn't possess the intellectual property rights to the components in its PCs. Consequently, other PC makers created cheaper clones, eroding IBM's market share. The company attempted to differentiate itself from these clones with its OS/2 operating system, but the effort faltered when Microsoft's Windows claimed dominance.
IBM's retreat from the PC market is a testament to the consequences of losing a moat and failing to adapt to nimbler competitors. By the late 2000s and early 2010s, IBM grappled to grow its aging enterprise software and IT services divisions against nimbler competitors like Microsoft, Amazon, and Google. Instead of investing aggressively in new cloud services and transforming its traditional software and services into cloud-based solutions, IBM focused on selling off underperforming units, cutting costs, and repurchasing shares to boost its earnings per share (EPS).
By the time IBM entered the cloud race with the acquisition of SoftLayer in 2013, it had already fallen significantly behind its rivals. Its revival didn't occur until 2020 when Arvind Krishna, IBM's new CEO, sold its struggling infrastructure services business and leveraged its RedHat acquisition (in 2019) to expand its higher-growth hybrid cloud and AI sectors.
Is Alphabet on the Same Path?
Pessimists predict a similar fate for Alphabet as it grapples with generative AI platforms eroding its search engine's effectiveness and targeted ads. Google's attempts to stay competitive with its own AI platform, Gemini, may result in it becoming the OS/2 of the AI market if it trails ChatGPT and Microsoft's Copilot.
Android, an open-source OS, can be customized easily by other companies like Amazon, making it simple for them to build their app-driven ecosystems using forked versions of Android (such as Fire OS). Google's cloud platform is growing, yet it still trails Amazon Web Services (AWS) and Microsoft Azure in the cloud race.
YouTube, a significant driver of advertising growth, lacks a meaningful moat against rivals like TikTok and Reels. Top creators can effortlessly broadcast their content across these platforms, and they may eventually migrate to the one offering them the largest share of ad revenues. YouTube attempts to counteract this pressure by growing its subscriptions business, suggesting that its advertising growth may plateau in the coming years.
The US Department of Justice (DOJ) could weaken Alphabet's defenses by compelling it to sell Chrome, which gathers user data for its core advertising business, and Android, which binds 2.5 billion users to its Google-powered apps.
Like the old IBM, Alphabet attempts to offset this pressure by streamlining its workforce, cutting costs, and repurchasing 11% of its shares over the past five years. However, its future remains uncertain if it fails to keep pace with the shift toward AI services.
Alphabet isn't destined to be the new IBM (yet)
While it may be alluring to dismiss Alphabet as the next IBM, it's still growing at a faster rate than Big Blue. Its growth initiatives may have been sloppy, but they could bear fruit in the coming years. Keep a close eye on its recent challenges, but don't discount a surprising recovery when it eventually gets its act together.
- Alphabet's Google, with its market-leading cloud services, poses a significant challenge to Lenovo in the tech sector.
- Despite the existential threats to Alphabet's core advertising business, it has managed to increase its EPS at a CAGR of 23% between 2014 and 2024.
- The diverse range of market-leading services offered by Alphabet, such as Google, Chrome, Android, YouTube, and its cloud services, make it undeniably a formidable force in the finance market, attracting investors worldwide.
- Some bears in the finance world suggest that Alphabet's future could be under threat, comparing it to the trials and tribulations experienced by IBM. However, Alphabet continues to grow at a faster rate than IBM did, indicating that it may not be destined for the same fate yet.
