Throughout history, mankind has explored, conquered and ruled the world by empires. Whether it was the Romans, Greeks, Mongols or the British Empire, conquering and building an empire involved amassing resources, nations, and a powerful legacy. However, the days of command and conquer are long gone. The world is interconnected, barriers are non-existent, trade is global and cultures are diverse. Whilst we don’t see a return to the age of empires, a new world order is at play and the balance of power has shifted away from Government’s to a handful of tech giants.
What dawned on us, was just how powerful the world’s largest corporations really are. Apple’s revenue topped $222 billion. If Apple were a country, it would be the 45th largest country, larger than Vietnam (GDP $220bn), New Zealand (GDP $201bn) and Qatar (GDP $166bn). Combined the top 5 tech giants – Apple, Google, Microsoft, Amazon and Facebook, they rake in close to $460 billion. That puts them near the top 20 largest countries in the world by GDP. In between Belgium and Thailand (GDP $455bn). Recently Apple’s market capitalisation recently pushed past the $1 trillion mark and Google is not far behind with a market capitalisation of $900bn. As you can see the FANGS are some of the most powerful corporations in the world.
There’s a prediction that goes something like, “In the future, Corporations will take over the world and there will not be governments”. A bit far-fetched and crazy, maybe, but is it? Corporations have acquired so much power that they can dictate their own terms to virtually any Government. As a result of decades of globalisation, corporations can exploit the free movement of capital to build factories in nations with the weakest labour unions or conduct operations in countries with lax laws. Their decisions are based on maximising shareholder returns. This all however, brings about a looming complication. Whilst the tech giants are expanding, growing and investing heavily into tech, Government funding for scientific research and new technology keeps falling. Alphabet, Amazon, Apple, Facebook and Microsoft are all spending ridiculous amounts on the intelligent future. Collectively they spend in excess of $60 billion on research and development per year. The five tech giants are building the future of tomorrow, and that future is Artificial intelligence. Corporations will decide how to deploy them, and to what level of power they will control and yield.
Alphabet (Google) is planning to take over the world
The common perception is that Google is merely a search engine. But Google is so much more. It’s on every PC and every phone. It’s in everyone’s pockets, listening and learning. Through its web search engine, Google has created a gateway into our lives. It has the ability to gaze deep into our day to day activities through the web pages we see, where our phones travel, what we do, what we post on Facebook and Instagram, what we buy and what we email each other. It has already taken over the web and smartphones and its next frontier is artificial intelligence, automobiles, and robotics. In the offline world, Google is creating robots and driverless cars that are able to learn and make decisions with minimal human intervention. Artificial intelligence is shaping our lives and our future at an exponential rate. Driven by an explosion in cheap capital, rock bottom interest rates and investor funding, technology is advancing on so many fronts, all at the same time.
Google monitors us, and we don’t even know it. Its tracking systems are extensive and it’s near impossible to use email without being tracked by Google. After collecting so much data, it identifies our interests, preferences, beliefs, and problems. If you’re an Android user, Google knows even more about you. With every new product and every new virtual service feature it releases, it becomes more and more apparent that Google isn’t just a search engine company, Google is big brother. It is everywhere and soon every part of our daily lives will be managed it. And it doesn’t become more obvious than with its latest product Google Assistant. It’s a voice activated personal assistant that can do virtually anything. An intelligent AI that learns every second of the day, and is able to assist you before you even know you need assistance.
For example – Google Home is powered by Google Assistant. The AI bot harnesses Google’s massive knowledge base to deliver solutions or responses to almost anything. Google Home is constantly listening, always ready to do what you want. Also on the horizon is self-driving cars. Google doesn’t make cars, but it spends a lot of time and money mapping streets and creating AI. Making it a perfect fit, to teach a car to drive from point A to point B, without the assistance of a human. What all of these technologies have in common is AI. Artificial Intelligence is more powerful than any other innovation. Those that fail to adapt and transform will soon find themselves left behind, waking up in a world full of technology that feels more and more like magic.
The largest tech firms, Alphabet (Google’s parent), Amazon, Apple, Facebook, IBM and Microsoft are investing massive dollars in developing their AI capabilities. But it’s really Google that is leading the world in the race to dominate artificial intelligence. The company has been at it longer than anyone else and is miles ahead. It all started when Google designed a program called AlphaGo. It was put together by its DeepMind artificial-intelligence team. The aim was to create AI that was capable of beating one of the top human players at a game called Go. This game is exponentially more complex than chess and requires, at least among the top humans, a certain degree of intuition and learning. Google did just that, it created an artificially intelligent computer system. AlphaGo AI won the game in South Korea, by resignation after 186 moves. The win marks the first time that a computer program has defeated a human Go player. It also marks the birth of AI.
Since AlphaGo, Google has leapfrogged and advanced its AI capabilities at a rapid pace. In May 2017, Google announced the creation of AutoML. That’s an artificial intelligence program capable of generating its own Artificial Intelligence. An AI that can create a “child” that outperforms all of its human-made counterparts. Mind boggling. Google’s I/O at a conference, took a phone call to book a haircut. It was a phone call made by the Google Assistant. What was impressive was that the person on the receiving end of the call didn’t seem to realise they were speaking to an AI. It’s a huge technological achievement for Google. Since then Google has trained its algorithms to detect over 50 sight-threatening conditions. The system can now do so with 94 percent accuracy. AI is taking on a number of roles within health care more widely and doing things better than a human can. AI is also being used to help emergency call dispatchers in Europe detect heart attack situations.
This is a part of the business is highly secretive. In fact we hadn’t even heard of. It’s a part of business that has access to Ancestry’s DNA database and its main target is to combat age related diseases. Its mission is to harness advanced technologies to increase the understanding of the biology that controls lifespan. In other words, to cure death.
A name you may have never heard of, but soon will is Waymo. It is the self-driving unit of Google. It is Google’s autonomous taxi. While Uber and Tesla are struggling with driverless cars, Google’s Waymo is years ahead. When it comes to self-driving cars, there’s Waymo and then there’s everyone else. There is a perception that Tesla and Uber are at the forefront of driverless cars. They’re not. Google has been at it a lot longer. In October 2015, Google was so confident in its tech, that it publically said a blind man could take an unaccompanied test drive on Austin streets with their technology. Fast forward to today, and still no other company has managed to build technology as sophisticated as this, three years ago. Waymo’s latest trial project involved teaming up with Walmart to give customers free rides to and from their destinations. What we’re witnessing is the start of the driverless car boom. There are currently 44 companies working on autonomous cars. From Mazda to Mercedes every major car manufacturer is ploughing big money into R&D into driverless cars and it’s becoming a very competitive space. It’s a race between the tech giants and the auto car manufacturers. Some have teamed up with each other to leverage their strengths. The main players in this game are: Apple, Audi, Autoliv Volvo, Baidu, BMW Intel Mobileye, Bosch Mercedes, DAF Daimler Volvo, Ford, GM Lyft, Honda, Huawei, Hyundai, Jaguar Land Rover, Microsoft, Renault-Nissan-Mitsubishi Alliance, NVIDIA Paccar, Samsung, Tesla, Toyota, Volkswagen, Waymo (Google) and Yutong (Buses). The two that stand out from the bunch are Waymo and GM. While Waymo isn’t making big money for Google yet, driverless and autonomous trucking is estimated to be a $10 trillion market in the coming years. And Google is in box seat to reap the rewards from this transformation.
Click below to see a short video on how Waymo works.
- Earnings per share (adjusted): $11.75 vs $9.59 expected by a Thomson Reuters consensus estimate.
- Revenue: $32.66 billion vs $32.17 billion expected by a Thomson Reuters consensus estimate.
Overall the brokers on Wall Street are very bullish on the company. Alphabet’s investments are driving revenue upside. JP Morgan Chase for example, has an Overweight rating and a December 2019 price target of $1,440 based on roughly 24.5x their 2020 estimated Alphabet GAAP earnings per share. Morgan Stanley says Alphabet’s $85 billion Websites business was up 24% year over year. It too has an Overweight recommendation. On fundamentals GOOGL stacks up quite well. The stock trades on a forward PE of 31.37x which isn’t overly expensive when you compare it to the likes of say Amazon which trades on a PE of 165x. GOOGL is highly profitable with EPS of growth of 22% and a forward ROE of 18.58%. Low debt and free cash flow is high.
Going by numbers, its unprecedented growth and profitability and what it’s got in store for the near future, makes it one of the most valuable companies in the world. It offers growth and value which no other company can match. It dominates the industries it competes in and there are few others that can match its abilities. Google controls 75% of the search engine market and YouTube controls 80% of its market. This competitive advantage spans across the board and will soon extend to AI and autonomous cars. Search Ad trends will continue to rise and is still easily Alphabet’s largest profit-creator. But what excites us most about Google is Waymo. After being simply just a R&D project, Waymo is on the tip of becoming a commercial business. Its self-driving unit is leagues ahead of any other tech company and it aims to launch a commercial driverless taxi service by year’s end. Move over Uber. Which-ever way you look at it, Alphabet (Google) is fast becoming an unstoppable force. It already is the world’s biggest search engine, impacts just about every facet of life, and has a huge influence on media, technology, entertainment, commerce and the dissemination of information. AI is the next technological advancement of our digital age that is not only gathering pace but transforming the way humans interact on a day to day basis.
No other company can match Google’s vast reach into human digital lives. That is what gives the company a serious competitive advantage. The fundamentals and future prospects all stack up. It’s the reason we think Alphabet (Google) could be a stock that should be a core holding in any portfolio. Wattle Partners holds Alphabet via the Platinum International Brands managed fund.