Disclosure: I own January 2025 Call Options and Shares of Alphabet Inc.
To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute. Google is a good example of a company that went from 0 to 1: It hasn't competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo!
Peter Thiel wrote this piece titled "Competition is for Losers" in 2014. Today, many people are starting to doubt how "definitively distanced" Google Search truly is from Microsoft. While Microsoft's vector of attack against Google search is different in nature, it is helpful to first understand the depth and breadth of competitive moats of Google Search today. Given it is a well known topic/company, my discussion on competitive moat is far from exhaustive, but I would highlight key moats of Google Search in the status quo business model. That's Section 1 of this write-up.
In Section 2, I will introduce you to different operating segments of Alphabet and show you my assumptions for these different segments.
In Section 3, I will touch on perhaps the meat of this writeup: operating cost structure of Alphabet's different operating segments. If you are very well versed on Alphabet's business, you may want to jump to this section. My core focus on this section is to understand the fixed cost component of Google Search business and how it changed over the last five years.
In Section 4, I explained my thought process on my capex estimates for Alphabet. I then used my estimates discussed in earlier sections to show what you need to believe to underwrite ~10% IRR for Alphabet.
Finally, in Section 5, I will leave some concluding remarks on Alphabet, and disclose my overall portfolio.