Google’s owner Alphabet has seen its revenues skyrocket over the last decade alongside the growth in online advertising, which dramatically accelerated last year with the forced digitalisation of many areas of the economy.
This has translated to a share price increase of more than 800 per cent over the past 10 years, and a 120 per cent increase from its March 2020 lows.
Alphabet is currently the fifth-largest public company in the world with a market capitalisation of $1.6trn, and makes up roughly 2.5 per cent of the MSCI World Index.
The question now is, can it maintain its growth, or will anyone who invests from this point on be buying in at its peak?
Reasons to be bearish
Google’s success in digital advertising has also caught the attention of government regulators.
The EU fined Alphabet €1.49bn in 2019 for abusing its monopoly in online advertising, while the US Justice Department recently filed an antitrust suit against the company. There are fears this could result in it being forced to break up.
The next concern is a matter of its size. Scottish Mortgage Investment Trust’s manager Tom Slater (pictured) 
believes the company’s sheer scale could be an impediment to future growth.
“These companies generate prodigious cashflows and have grown at a remarkable rate,” Slater said, referring to Alphabet, Amazon and Facebook.
“For us, the questions now are around how they deploy their resources in the future and retain their growth credentials at vast scale.”
Just last month, it was announced Scottish Mortgage had completely sold out of Alphabet.
Iain McCombie, manager of the Baillie Gifford Managed fund, also sold out recently, sharing Slater’s concerns.
He said: “Yes, its core business – the Google search business – is still doing very well. It's a very strong business, but the reason we liked Alphabet was it had these other businesses within it.
“It was really using the cash and the profits from Google to invest in all these other start-up operations like autonomous cars and things like that.
“We came to the view that a lot of these businesses have turned out to be a bit of a damp squib, and therefore the higher share price means that the upside for that business is probably less than we used to think it was.”
Meanwhile, Fundsmith Equity manager Terry Smith expressed concern about Alphabet’s profit margins in his annual shareholder meeting last year.
“When you look at the returns, they aren’t that great,” he said. “The returns on capital employed last year – and this is not atypical of the last half dozen years – is 17 per cent. It’s about average for the market, so it is not actually shooting the lights out.
“When we researched it, we found that it had made 235 acquisitions. It’s kind of interesting because most of them have been dire failures, so its capital-allocation process looks really bad.
“It has got this original core business and all of its attempts to expand outside that by acquisition have so far been very poor.”
But Smith said there could be more behind Google’s history of seemingly unsuccessful acquisitions.
“Nobody is that bad,” he said. “I wonder whether it meant them to fail – whether it is actually buying things and shutting them down. Whether one day as a result, we may see some great returns emerge again because it would have killed everybody that’s competing with it.”
Reasons to be bullish
Not all investors are so sceptical about Alphabet’s future. Christopher Rossbach, manager of the $168m J. Stern & Co. World Stars Global Equity fund, took the opposite view to Smith’s on Alphabet’s acquisition record.
He said: “If you look at great companies – including the big digital platforms – it has been the judicious way in which they've made acquisitions that has contributed to their growth.”
From the outside, he argued that it is extremely difficult to judge which of the companies and technologies it has acquired have made a big difference to its core business.
“Just because a platform was bought and then the actual external business went away, that does not mean that the company that acquired it didn't benefit from the technology and wasn't able to integrate it into what it's doing,” the manager explained.
As an example, he pointed towards Google’s 2008 acquisition of DoubleClick, which developed software to increase the purchasing efficiency of advertisers and minimise unsold inventory for publishers.
He said: “We don't see the DoubleClick business either anymore, yet we know that it is part of Alphabet’s infrastructure. 
“That's part of the challenge of technology,” he added. “It's very difficult to identify individual businesses that will become large businesses and prevail in the highly competitive environment that they're in.
“For Alphabet to effectively take a diversified approach to buy businesses is, I think, a prudent thing to do.”
Many other managers point out Google was criticised for its 2006 acquisition of YouTube for $1.65bn, but this part of the business generated annual revenues of almost $20bn last year.
Rossbach (pictured) said: “I think it has proved that it can find businesses like YouTube, like Gmail, like Google Maps, like Cloud Computing, that have high potential.
“I don't know where Waymo is going to go but certainly the addressable market is very significant and it is the leader in it in terms of autonomous driving. I don't know where AI [artificial intelligence] is going to go in terms of computing and in terms of practical applications, but it is the leader in it.
“So I think that's an investment that may well make sense, and I will give it the benefit of the doubt.”
In terms of Alphabet’s future growth, Rossbach argued that online advertising still makes up only a small portion of total advertising spend, and therefore Google’s total addressable market is still very much in its early days.
“There's tremendous demand for digital advertising,” he said. “In the first half of the year, prices have increased very substantially, because to some extent, the big platforms have allocated the full amount of space in the screen and other services for advertising – yet there is such substantial demand.
“Part of the growth in Alphabet is going to come from volume, in terms of search and increasing ongoing penetration of online activity. The other part is going to come from pricing – because the space that Google has to offer in search is going to become more and more valuable, and more and more businesses are going to compete for that.”
When it comes to the antitrust issue, Rossbach doesn’t believe it is in the interests of the US government to come down too hard on the company.
“I think Google and Alphabet have delivered significant value to their users and their advertisers,” he said. “It's the actual integration and efficiency of the infrastructure that they provide that allows that.
“People will naturally go where the users are and where they can get the clicks and that is the companies that provide the best service at the lowest cost – that's a benefit for consumers.”
He expects the outcome will not be a breakup of the business, but more fines and compromises, as have been seen in the past.
“I think Alphabet has to take it seriously, and it has the resources to be able to manage,” he finished.