Nick Train is a well-known UK fund manager with an excellent long-term performance track record. In the past, he’s actually been called ‘Britain’s Warren Buffett’. Recently, Train and his team added a popular large-cap S&P 500 stock to their Lindsell Train Global Equity fund. Here’s a look at the trade and my take on the investment.
A tech giant
The S&P 500 stock they bought for their global equity fund was Alphabet (NASDAQ: GOOG). It’s the owner of Google, YouTube, and Waymo (self-driving taxis). Listed on the Nasdaq, it currently has a market cap of around $2trn. So, it’s a behemoth of a company.
Why they bought
It seems that Train and his colleagues like the stock for several reasons.
One is that they believe it has a wide moat. They reckon the company’s scale and access to vast data pools are a major barrier to entry by competitors. And they believe the expansive ecosystem around search (maps, images, news, shopping, etc.) fortifies the moat further, locking in users.
Alphabet has built an extremely profitable, $300bn+ revenue empire, protected by a deep, and in our view deepening, moat. Its genuinely unprecedented scale gives it access to vast data pools, richer perhaps than those available to any company, in any industry, at any point in history.
Lindsell Train Global Equity April factsheet
Another is the diversified nature of the company. Over the years, Alphabet has made a number of transformational acquisitions including that of Android in 2005, YouTube in 2006, and Deep Mind in 2014. These have expanded the company’s offering significantly. It also has Google Cloud – its fastest growing segment.
The balance sheet is clearly another attraction. They describe it as “one of the strongest balance sheets” they’ve ever seen.
Finally, they appear to like the valuation. Back in April (when they bought), Alphabet was trading at 16 times GAAP earnings – a near historic low. “It is not often we get the opportunity to upgrade the portfolio at such attractive relative prices”, the team wrote in the latest factsheet.
My take
Now, I like this trade from Train and his team. To my mind, Alphabet looks attractive at current levels (and could be worth considering as a long-term investment).
That said, there are some risks to be aware of here.
The biggest risk, in my view, is disruption to Google’s business model from new generative AI apps such as ChatGPT, Perplexity, and Grok. Right now, the way people search for information is changing rapidly, and this isn’t good for Google (which has basically had a monopoly on search for 20 years).
I think Google will continue to be used by a lot of people (I can’t see my mum using Perplexity or Grok), at least in the next few years. However, a lot of professional investors are worried about the threat from generative AI apps and have been dumping the stock.
Another risk is an economic downturn. This is more of a temporary threat but it shouldn’t be ignored as it could lead to a drop in advertising revenues.
Regulatory intervention and competition from rivals in cloud computing and self-driving cars are two other risks worth highlighting. These add some uncertainty.
Given all these risks, there’s no guarantee that Alphabet will be a good long-term investment. However, with the stock trading at a very reasonable valuation, I think it’s worth a look today.
