Company Overview: Alphabet is a global technology company focused around key areas, such as, advertising, operating systems and platforms, enterprise and hardware products. The company generates revenue primarily by delivering online advertising, by selling apps, hardware, and contents on Google Play.

Name Ticker D + G Compounder Score Alphabet Inc. Class A GOOGL 13.75% 8

Last Twelve Months Highlights: Google's cloud demand and content use is offsetting an advertising slump. Core search ads exited 2Q with flat year-over-year growth vs. mid-teens declines in March, echoing internet peers in sight of stabilization. We believe cloud demand is here to stay, enabling sales growth of over 40%. A surge in use across YouTube, G Suite and other properties is opening revenue channels in e-commerce, gaming and cloud, which we think is improving the long-term outlook and diversifying Alphabet. With a ballooning cash balance, Alphabet announced a $28B buyback program.

Bull Case: • Cheap Valuation - With their renewed focus and investments on Cloud, I expect Alphabet to continue to grow its market share in IaaS and while they are the #3 player in a $40B industry, there is share to take from other players to drive growth. We believe that these investments that Alphabet made will ensure that they take share from the multitude of other companies that collectively have 32% of IaaS market share. As Alphabet proves to the market that their Cloud strategy is working, its EBITDA multiple should expand as the market gives weight to its Cloud strategy. • Google Cloud is Growing - Alphabet developed an ambitious plan to take share in cloud computing and become the #2 player in this industry. Google Cloud comprises their IaaS, PaaS and SaaS plays via GCP and G-Suite which is their SaaS offering as a Microsoft Office 365 alternative. In the most recent quarter, Google Cloud revenues of $3.0B with growth of 43% y/y (vs. +52% y/y in 1Q20), with continued growth from GCP and G-Suite (including Google Meet which benefits from work-from-home). The company also noted increasing traction with large clients in Cloud, and its backlog reached $14.8B in 2Q20 (up from $12.8B in 1Q). Google and Microsoft should be able to post cloud revenue growth in excess of 35% in 2020, while Amazon may top 30%. • Large Total Addressable Market for Advertising Revenue – Per the company, GOOGL owns 40% of the digital ad market space worldwide. There has always been an overhang that the company will reach a ceiling in digital ad spending. Luckily, there remains a long runway for growth. Per management, 40% of advertising budgets remain offline, 90% of commerce still offline. Furthermore, the company continues to see addition parallels where they see an opportunity for new parallels in the monetization of digital advertisements.

Bear Case: • Aggressive Competition from Amazon – Google may be losing market share of online advertising revenue worldwide, due to aggressive competition, especially from Amazon, which increasingly captures more revenue for this concept and increases its market share. Amazon is slowly gobbling up Google's ad revenue. The changing habits of electronic consumers, who for the most part no longer search Google, but go directly to Amazon's search, is causing companies to prefer Amazon over Google as a platform for their ads. • Unfriendly Share Structure - While we are fans of Google’s management team, we believe that the stock split was a shareholder unfriendly move. We believe management is executing on its strategy and performing well so far, but if any serious missteps are made, it will be much more difficult for shareholders to effect any change in leadership. • Government Noise - Google and Facebook, at the least, seem destined to face government antitrust challenges this year or in 1Q21 as pressure on antitrust enforcers to take action against powerful tech platforms has reached a fever pitch. Increasingly frequent complaints and concerns from observers and politicians are aired, motivating Justice Department, FTC and state probes that could possibly lead to challenges. Regulation may be the bigger risk, in our view.

Overall Thesis: We see Alphabet as one of the best-positioned companies in the digital ad sector, with exposure to some of tech’s most important secular trends through mobile search, YouTube and enterprise cloud computing. We expect Cloud to become a more central component of the thesis over time (as the business scales and margins improve) and expect Google to continue capturing market growth from the ongoing shift towards digital advertising. Key risks include revenue impact from potential product changes mandated by regulators, weaker-than-expected cost discipline, competition, and dilutive M&A.

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