The Dead Live Longer

Dec 20, 2024 7 min read

Thierry

„I wake up every morning like it’s day one, and the reason is there’s always something we’re doing that has never been done before”

– Jensen Huang, CEO and Founder of Nvidia

arvy’s teaser: Labeled “dead,” Alphabet roars back with Willow, its quantum breakthrough. Cutting-edge innovation meets resilience as the stock hits new all-time highs. Disruption fuels opportunity – Alphabet’s moat is alive and thriving.

A durable competitive advantage.

It all starts with fending off competition and maintaining profitability into the future. Simple.

This is possible if a company has a moat or a durable competitive advantage. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders. The term was made popular by Warren Buffett. It builds a strong foundation for everything that comes after. One company whose moat has been under constant attack in the past is Alphabet, the parent company of Google. The business is under pressure on two fronts – from the government and from several new AI-driven search competitors. It has the capacity to meet both challenges and continue to prosper. How?

Alphabet consistently proves that it remains at the forefront of technological innovation.

Its latest breakthrough?

Quantum Computing.

Chart 1: Google: Meet Willow, our state-of-the-art quantum chip

Source: Blog, Google

Quantum what?

Artificial Intelligence, Metaverse and now the new buzzword Quantum Computing?

What is this fuzz all about?

Let’s look at it so we at least understand the basics.

Quantum computing is a revolutionary way of solving problems using the principles of quantum physics. Unlike classical computers, which process data in bits (0 or 1), quantum computers use qubits that can be 0, 1, or both at the same time (superposition). This allows them to explore many possibilities simultaneously, making them incredibly fast for complex tasks like simulations, optimization, and advanced calculations.

In simple terms (chart 2):

Classical computers work like flipping switches—either on (1) or off (0).
Quantum computers can flip many switches in different combinations at once, saving time and solving problems classical computers can’t.

The result?

It can solve problems in minutes that would take supercomputers 10 septillion (10^24, a 10 with 24 zeros) years and reduces errors exponentially as it scales – solving a challenge researcher have faced for 30 years and that has never been done before.

Yet, quantum computers are still experimental, requiring extreme conditions like ultracold environments and being sensitive to errors. However, Google’s parent company, Alphabet, recently announced a breakthrough with its quantum chip, Willow. The progress with Willow shows that Alphabet continues to be at the forefront of technological innovation. Again!

This is important because the irony of the tech world is that even the disruptors themselves are constantly at risk of being disrupted by emerging innovations.

Reflected in a weakening of the moat.

Chart 2: Quantum Computing vs Classical Computing

Source: CBInsights Research

Labeled “Dead”

The technology sector has been the best-performing and fastest-growing sector over the past decade, driving the market’s narrative during the prolonged bull run after the global financial crisis.

Historically, the driving trends of a bull market are concentrated in the world’s largest companies (chart 3), and Alphabet, with its high gross (58%) and net (28%) profit margins, has been a key player. However, where big money is made, competition follows, and everyone wants a slice of the pie.

Disruption risks are high in the fast-moving tech industry, where innovation can come from anyone with programming skills and little capital. Even the biggest players are not safe, living by the mantra: “It is always Day-1.”

And that is why you need a durable competitive advantage. A moat.

Alphabet has faced scrutiny, from fears of ChatGPT replacing Google Search to government efforts to break up its quasi-monopoly with Google Chrome and its data. This uncertainty led to Alphabet having the cheapest valuation among the “Magnificent 7” (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, Tesla), with an average P/E ratio of 18. It was labeled “dead,” reflecting the risk of disruption.

This created a large margin of safety for an exceptional business model that generates an annual free cash flow of $70 billion.

Along with the potential for surprises.

Chart 3: Narratives drive bull markets: The top 10 stocks by market capitalization and their story

Source: Gavekal

Never trust the story unless confirmed by price action

I believe the market is the best-informed analyst in the long run, helping uncover investment opportunities validated by thorough analysis.

At arvy, we follow a key rule: never trust the story or just the numbers unless confirmed by price action. Beyond a strong business and corporate culture – the “Good Story” – we identified one of the three most significant chart patterns – the “Good Chart” – in Alphabet’s stock this year.

It was not the box consolidation or double bottom pattern; it was the cup-with-handle.

This pattern signals strength, and we acted quickly, adding to the position as the market responded to the new catalyst – Willow. The strong price action showed the market’s willingness to reprice Alphabet’s valuation.

While quantum computing remains in its infancy, the market sent a clear message: Alphabet continues to lead in technological innovation. The result?

The most bullish signal of all – new all-time highs.

As they say: The dead live longer.

Chart 4: Alphabet over the last five years