Google’s Alphabet Soup
On August 10th, Google announced a major overhaul of it’s corporate structure to make it “cleaner and more accountable” and rebranded itself Alphabet. A quick history of my relationship with Google as an analyst highlights why I think this is a seminal moment in corporate America history.
I started covering Google as an equity analyst almost exactly five years ago. On August 17th, 2010, I initiated coverage with an Underperform rating, and a $525 price target (it was trading at $485). My simple premise was that the threat to Google from Facebook was vastly under-appreciated by Wall Street (my cringeworthy CNBC appearance can be seen here). The king (Google) was dead, long live the new King (Facebook)
However, the more I learned about Google, the more impressed I became. I saw Google make little changes in their search results that improved revenue 1%+. My God, 10+ years in, it was still early in Google search! Less than two months after my initiation, on October 13, I raised my rating on Google to Neutral, and my price target to $575 (the stock was $540). Google continued to imrpess with its innovation. With YouTube. With Android. By December of 2010, I had become a raging Google bull. On December 14th, I raised my rating on Google to Outperform, and upped my price target to $750 (it was trading at $595). The King (Google) wasn’t dead, it turns out there were now two kings (Google & Facebook). While I was right about Facebook emergence, I was initially wrong about Google because I failed to appreciate what a great innovative company Google was, and how fast the online advertising market was growing.
Now, five years later, Google and Facebook are innovating on a scale that I don’t believe the world has ever witnessed. To get a sense for the breadth of Google’s innovation, watch this awesome two minute clip by Bloomberg Business.
To better facilitate innovation, Google restructured itself in to Alphabet, along the lines of a traditional conglomerate like Berkshire Hathaway. Everything old is new again. Is that truly the best structure? Will Alphabet better enable innovation at Google? Will an old school conglomerate structure truly optimize innovation? How will Google determine success? What are the KPIs? How will Facebook evolve it’s corporate structure overtime? These are relevant questions as the most innovative companies in the world try to keep their edge. I think these are epic questions that will determine our ability as a nation to continue to lead the world in innovation and drive our economy forward.
There has been a lot written about Alphabet, here are the pieces I found most thoughtful on this seminal move:
“Why Google’s Alphabet Reorganization Was The Right Move” by Vivek Wadhwa in The Washington Post
Answer to “Why Did Google Create Alphabet” by Anup Gosavi on Quora (with 5k+ upvotes)
“The Big AlphaBet” by Om Malik on his blog
“20 Things I’ve Learned From Larry Page” By James Altucher on his Medium Blog (more an homage to Larry Page then an insightful view on Alphabet)
Finally, to show they still have a sense of humor, in his letter announcing the formation of Alphabet, Larry Page included this link in a randomly placed period (after “drone delivery effort”).