A new year is upon us, which is also the time when you'll see a lot of writers pitching their best stock pick for the year. I'm not pitching my favorite idea for 2025, though. Instead I'm looking for a stock I'd buy and hold for the next five years.
On that front, my favorite idea is Alphabet (GOOGL -0.38%) (GOOG -0.26%).
Google is an advertising and search juggernaut
Alphabet is the largest digital advertising company in the world. Its Google search engine holds about a 90% global market share. Within the U.S. it has an over 75% market share for desktop searches and 95% for mobile.
While Alphabet faces some potential challenges in search through new artificial intelligence (AI) powered search engines, such as SearchGPT and Perplexity AI, the company has some big advantages. The first is that it has massive amounts of search data accumulated through the years along with access to real-time news and data. Its AI models will be trained on this data, so as its search and AI begin to merge it should lead to a better user experience down the road.
It also has a big advantage on the monetization end. Thanks to its size, Alphabet has scale with both advertisers and search users. Upstarts would need to lose a lot of money to draw users away from Google and eventually try to monetize them.
Meanwhile, Alphabet has a huge opportunity with AI. Historically, the company only serves ads on about 20% of its search queries. With AI Overviews and its Gemini app, it should be able to create new ad forms to monetize some of the 80% of its traffic it currently doesn't serve ads to today.
In addition to Google, Alphabet also owns the largest streaming platform in the world by viewership, YouTube -- another huge source of ad revenue for the company. YouTube has proven to be a valuable AI training tool as well. Alphabet's new Veo 2 AI video generation tool was trained on YouTube, and the result was a product significantly better than the Sora AI video generator that OpenAI introduced weeks ahead of Veo 2.
In the same way that Veo 2 has shown to be superior to Sora due to YouTube, Gemini could eventually become much better than ChatGPT due to its ability to train on Google's massive amounts of historical search data.
Image source: Getty Images.
Google Cloud is aiming to be the cloud computing winner
In addition to getting Alphabet's dominant ad network, investors also get the world's third-largest cloud computing company. Google Cloud currently has about 12% market share, but last quarter it was the fastest-growing of the big three cloud providers with year-over-year revenue growth of 35%.
The company has also reached a profitability inflection point in this business. Cloud computing is a very capital-intensive, fixed-cost business in which scale is necessary to achieve a profit. Fixed costs are expenses that are present regardless of sales volumes. So once revenue can cover these fixed costs, companies achieve tremendous operating leverage in which profit growth greatly outpaces revenue growth. This was on display last quarter, as Google Cloud's segment operating income surged from $266 million a year ago to $1.95 billion.
Alphabet credited its strong cloud computing growth to customers adopting its AI platform to build and customize their own AI models and applications. It noted that its Gemini model was also gaining a lot of traction, as were its data platform BigQuery and AI-powered cybersecurity solutions Google Threat Intelligence and Security Operations. The company also called out its customized TPUs (tensor processing units), which it uses in conjunction with GPUs (graphic processing units), as a differentiator that reduces inference processing times and lowers costs.
Its custom AI chips should continue to help Google Cloud improve its margins, which only increases the attractiveness of this fast-growing business.
Emerging opportunities for Alphabet as well
In addition to these established market-leading businesses, Alphabet also has a few emerging businesses that hold a lot of future potential.
One is Waymo, its self-driving robotaxi unit. While Tesla gets a lot of press for its robotaxi venture, Alphabet is the only company in the U.S. currently delivering paid robotaxi rides. It offers services in San Francisco, Los Angeles, Phoenix, and Austin, with plans to expand to Miami and Atlanta in the U.S. and Tokyo abroad. The company is teaming up with Uber Technologies in several of these U.S. cities for both ride-hailing and Uber Eats delivery, and with taxi company Nihon Kotsu in Japan. Alphabet still needs to lower the costs of the technology to turn this into a profitable venture, but it has taken a clear lead in the space.
The company also just announced a major breakthrough in its quantum computing unit. One of the biggest issues with quantum computing is that it has been error-prone, but Alphabet's new Willow chip has shown the ability to error correct while processing. Commercial applications for quantum computing are still many years away, but this is another area in which Alphabet has taken the technological lead. Quantum computing, meanwhile, has the potential to be the next big technological breakthrough after AI.
Attractive valuation
Despite Alphabet's many strengths and opportunities, it is one of the cheapest megacap technology stocks, trading at a forward price-to-earnings (P/E) ratio of just above 19.
Data by YCharts.
That's a bargain for all the opportunities that the company has ahead. As a leader in digital advertising, search, video streaming, cloud computing, autonomous driving, and quantum computing, Alphabet is the one stock I'd want to buy and continue to hold over the next five to 10 years.
