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Alphabet’s portfolio of innovative projects could pay off over long term

The Motley Fool

In August 2015, the company formerly known as Google changed its name and corporate structure to better reflect its business model and strategy. Alphabet (Nasdaq: GOOGL, GOOG) is now a collection of businesses of which Google is the largest and most important contributor in terms of sales and earnings.

Its “Other Bets” segment includes projects and businesses such as Fiber, Nest, self-driving cars, Google X, and health-care ventures such as Calico and Verily, among others.

Google leads the online advertising field, with one of the most valuable brands in the world. It has seven platforms with more than 1 billion monthly users: Google Search, Android, Maps, Chrome, YouTube, Google Play and Gmail. The more Alphabet grows, the more information it collects from users, helping it improve the quality of its services and offer more effective ads.

Alphabet’s “Other Bets” include several businesses with little economic promise in the short term. However, the diversified portfolio of innovative projects could pay off well for investors over the long term. After all, YouTube seemed like a moon-shot project a decade ago, and now, on mobile alone, it reaches more 18- to 49-year-olds in the U.S. than any TV network, including both broadcast and cable TV.

(Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and has recommended Alphabet.)

Ask the Fool

Q: When I buy a share of stock in a company, does it get the money? And what does owning some shares really get me? – K.R., Wilkes-Barre, Pennsylvania

A: Shares of stock represent real ownership stakes in companies. If a company has a million shares outstanding and you buy 100 of them, you own one ten-thousandth of the company. As the company grows more valuable, so should your shares.

Companies that “go public” via initial public offerings (IPOs) collect most of the cash generated when shares are created and initially sold. But once the shares start trading on the market between investors, the company doesn’t get a piece of those transactions. (Brokerages do, though.)

Still, companies care how their stocks do. A falling stock price lowers a business’s market value and can make it easier for it to get bought out. A rising stock price can help insiders with stock or stock options get richer, and it can help the company buy another company with stock, costing it fewer shares.

Q: What are “Freddie Mac” and “Fannie Mae,” and what do they do? – H.W., Abilene, Texas

A: Originally known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., and respectively created in 1938 and 1970, Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that support affordable homeownership and rental housing in America by making mortgage money available.

Instead of actually loaning money, they operate in the secondary market, buying and guaranteeing qualifying mortgages from lenders so lenders can turn around and lend more money to more borrowers. The GSEs then package together bundles of loans and “securitize” them as “mortgage-backed securities” so they can be sold and traded.

My dumbest investment

My dumbest mistake was buying shares of Solar City at $60 and watching them plummet. Thanks, Motley Fool, for some great investment advice! – L.C., online

The Fool responds: You’re right that Solar City was one of the stocks recommended in our investment newsletters – and it burned us, too, dropping some 65 percent from when we recommended it in our Motley Fool Rule Breakers portfolio to when we issued a “sell” recommendation in November 2016.

It’s a simple truth that not all of even the best investors’ ideas will prove profitable. Overall, Rule Breakers recommendations have significantly outperformed the S&P 500.

So what went wrong with Solar City? Well, one problem was its business model, which featured leasing solar equipment and accumulating a lot of debt on its balance sheet. Rising expenses didn’t help the unprofitable company, either. The struggling company was recently bought by the electric car company Tesla.

It’s worth remembering that even savvy investors won’t always agree on the merits of various investments. At the time of this writing, three of our investing newsletters recommended buying shares of Tesla, while two recommended selling. Tesla has a lot going for it, such as robust sales growth, but it faces increasing competition, it’s carrying a lot of debt, and its valuation seems steep. Some have lost their faith in Tesla because of the Solar City acquisition, in part due to Tesla founder Elon Musk’s ties to the company.

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