Chapter 51: Spotlighting Alphabet Again: Comprehensive & Intact Value Creation Drivers.
Dear Clients,
The last time we wrote about Alphabet (GOOGL) on June 13th, 2024, one of the highest weighted members of our investment portfolio (See Chapter 43: Spotlighting Alphabet: An Expansive Set of Value Creation Activities), we emphasized the scale, breadth and depth of its network effects in an era of generative AI. We discussed that the platform’s intact and comprehensive set of network effects relied on personalized data that could then get reflected back to users via more optimal search, complex querying, and ad relevancy. In that installment, we cited a long timeframe as a comparative advantage; we wrote: In the wise words of legendary late investor, Charlie Munger: “The first rule of compounding: Never interrupt it unnecessarily.” Since the time of our last writing, Alphabet shares have returned nearly 47%, outperforming the broader S&P500 index by over 18%. Our convictions in Alphabet shares remain as strong as they were in June 2024. This is especially in light of the recent antitrust ruling, which we will discuss below.
August 2025 witnessed an important milestone for Alphabet, which had previously been under a legal overhang for anticompetitive practices in online search. While the US Department of Justice (DoJ) had been seeking forced divestitures of key assets, namely Google Chrome, Judge Mehta presiding the case ruled that the DoJ had “overreached” in its proposed remedies; the judge ruled that a divestiture would be “incredibly messy and highly risky,” coming at the expense of consumer welfare. Furthermore, the judge differentiated between Alphabet’s “best in class search quality, consistent innovations, investment in human capital, strategic foresight and brand recognition” versus distinct anticompetitive acts. In other words, having a “superior product” or a “business acumen” is different from conduct that maintains an illegal monopoly. As a result, no Chrome divestiture was required, sending GOOGL shares up 9% the day after the ruling. We are in agreement with Judge Mehta’s ruling, which effectively preserves Alphabet’s network effects for the benefit of all stakeholders – users, advertisers, distributors, and business partners.
The main two concessions that the judge ruled Alphabet would need to make were: 1) The ending of exclusivity agreements with Apple – note this does not mean the ending of the agreement itself, but rather, the ending of exclusivity around distribution arrangements; and 2) Sharing of certain indexation data, particularly with respect to longer complex queries, in which Alphabet has an advantage. Because indexation is the “secret sauce” of search, we expect Alphabet to review this decision carefully, and possibly appeal.
In summary, the court ruling recognized the balance of risk and opportunities surrounding Alphabet’s position in the advertising ecosystem. Much as we had recognized the benefits to consumer welfare of Alphabet’s extensive network effects in our June 2024 journal installment, Judge Mehta struck a similar stance. We will remind clients once again that it is the sustained and long-lived compounding growth characteristics that create the vast majority of shareholder wealth. That these compounding growth characteristics may continue unimpeded is validation of our investment thesis in Alphabet and our long-term view as to the expansiveness of its platform’s value creation activities.
Finally, at the heart of the technology and communications sector is the concept of disruptive and innovation-led growth, wherein new paradigms such as generative AI evolve to become the secular leaders of the next generation; having an early mover advantage in identifying these paradigms is an interpretational advantage. While being mindful of new entrants and disruptors into the space, we are also cognizant of the formidable, long-lived advantages companies such as Alphabet have built for themselves – and hence, their annuity producing earnings power should continue to re-rate to reflect these longevity, profitability and sustainability characteristics.
We hope clients are enjoying the start to autumn.
Warmest regards,
Grace Wang | Senior Portfolio Manager
Samuel Jang, CFA | Investment Associate
Leslie Mah | Associate Advisor
Katherine Yang | Associate
Steven Bos | Administrative Assistant
Grace Wang Portfolio Management Practice of RBC Dominion Securities
Email: gracewangpractice@rbc.com
Phone: 604-257-2483
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Vancouver BC, V6E 0C5
gracewangpractice.com
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