Investing in the Front Door to the Internet

October 2025 Client Letter

Last month, I wrote about Apple as a modern-day consumer staple, a company whose products have become integral to everyday life. The iPhone helps us communicate, navigate, research, shop, and stay connected in ways that are second nature.

If Apple is a modern consumer staple, then Alphabet, the parent company of Google, could be viewed as a modern utility. A utility typically provides an essential public service; operates at scale; and faces little viable competition because of its infrastructure, data, or network effects. By these measures, Google meets many of the same criteria.

Google Search has become the front door to the Internet for billions of people—an essential digital service much like electricity or water in the physical world. It is so deeply woven into daily routines—search, email, maps, documents, and video—that many of us could not function productively online without it. With an estimated 80–90 percent share of global search, Google has become not just a household name but also a pillar of the world’s information infrastructure.

Beyond Search, YouTube and YouTube TV have become part of everyday routines for millions of households. And this time of year, for us football fans, YouTube TV’s NFL Sunday Ticket is as close as it gets to a weekend fixture.

Google’s reach extends beyond screens. Through Waymo, its autonomous ride division, the company is operating services in Phoenix, San Francisco, Los Angeles, and Austin—reportedly completing around 250,000 paid rides per week in spring 2025. In March, Waymo logged over 700,000 monthly trips, more than 50 times its 2023 volume. The service has recently expanded to Atlanta (via Uber) and plans to launch in Miami and Washington, D.C., by 2026. Autonomous mobility adoption is accelerating, and Google is among the central participants.

Inside Google’s research labs lies an important frontier: the Willow quantum-chip project. Though still in its early stages, Willow represents Google’s effort to move beyond the limits of classical computing. Traditional computers operate on bits, ones, and zeros that must test possibilities one at a time, often brute-forcing through countless paths to reach an answer. Quantum computers, by contrast, use qubits that can exist in multiple states simultaneously, a phenomenon known as superposition. This allows them to explore many paths at once rather than sequentially.

If quantum computing becomes commercially viable, the shift could break through the boundaries of Moore’s Law. Tasks like predictive analytics, pharmaceutical research, and complex simulations could be performed not just faster but in entirely new ways. That is why Google is investing in this field, not merely to stay ahead in AI but to help shape the next computing paradigm.

While Google holds structural advantages, potential challenges exist. Governments continue to evaluate large tech platforms for competition and data practices, and emerging AI models could eventually introduce new forms of search or user interaction. However, most competitors currently lack the scale of data, infrastructure, and capital that underpin Google’s existing advantage. For now, its information backlog and technological depth are competitive strengths.

Financially, Google has been a profitable company. In its most recent quarter, Alphabet reported approximately $95 billion in cash and marketable securities and total debt of about $14 billion. Over the past 12 months, the company generated roughly $73 billion in free cash flow—often described as “owner’s cash,” since it represents what remains after funding operations and capital investments. Free cash flow can be used to pay dividends, repurchase shares, or reinvest in the business. In 2024, Alphabet reported net income of approximately $100 billion, placing it among the highest earners in U.S. public companies. The company also initiated a modest dividend in June 2024, something investors may overlook because of its long-standing tech label.

Some analysts and investors—the late Charlie Munger among them—have described Google as one of the most durable and wide-moat businesses ever built. Munger stated, “I’ve probably never seen such a wide moat,” when referring to Google’s competitive advantage. Whether or not one agrees, few dispute the scale of its global reach, the resilience of its recurring revenue, and the strength of its balance sheet.

Ultimately, Google’s expansive digital footprint depends on physical infrastructure including power, construction, energy systems, and the industrial networks that support them. The companies behind that infrastructure help form the foundation on which the digital world is built.

The Backbone of AI: Building the Physical Foundations

In the California Gold Rush era, not every prospector struck gold. Yet those who supplied the tools—Levi Strauss with durable work pants, Samuel Brannan with picks and pans—often built steadier fortunes. In investing terms, these were the original “picks and shovels” plays: the companies that prospered by enabling others to chase opportunity.

Today’s artificial-intelligence boom has its own version. Over the past year, we’ve discussed companies such as NVIDIA, Microsoft, and Broadcom—the first-order picks and shovels of the digital age. They design the chips, run the data centers, and provide the cloud platforms that make AI possible.

But major innovation waves often depend on a quieter group: those that build the physical foundation beneath the technology. These are the second-order picks and shovels. The companies that enable the enablers. They generate the power, build the infrastructure, and manage the systems that keep the digital economy running. In many ways, these industrial leaders form the physical backbone that supports the AI-driven world.

Several of our industrial holdings illustrate this theme:

Caterpillar (CAT): Caterpillar supplies the heavy machinery and backup-generation systems that prepare and power massive data-center projects. Its equipment shapes the ground on which digital infrastructure stands. Caterpillar’s dividend legacy, which includes three decades of annual dividend growth, has helped make this a reliable industrial company.

Cummins (CMI): Known for its engines and generators, Cummins is also building its future around cleaner power—hydrogen, battery systems, and integrated microgrid solutions. The company’s nearly 20-year history of annual dividend increases underscores a culture of consistency even as it adapts to energy transition trends.

Emerson Electric (EMR): Emerson offers advanced automation, process control, and power-management technologies used across data centers, utilities, and manufacturing. Its history of dividend growth reflects both financial discipline and steady cash generation. Emerson’s combination of engineering depth and shareholder reliability have made it a reliable industrial holding.

Sterling Infrastructure (STRL): Sterling specializes in site development, civil engineering, and transportation projects that support industrial growth and data-center expansion—essential groundwork before the first chip is installed. While Sterling does not currently pay a dividend, its existing work backlog and focus on high-return projects continue to drive long-term growth potential.

With its recent $505-million agreement to acquire CEC Facilities Group, Sterling is now adding electrical and mechanical services to its capabilities. CEC’s expertise in designing and maintaining power systems for semiconductors, data centers, and advanced manufacturing should complement Sterling’s civil infrastructure platform. The deal is anticipated to strengthen Sterling’s presence across the full project lifecycle, accelerate delivery timelines, and enhance cross-selling opportunities.   

Vertiv (VRT): Vertiv provides power and cooling systems that keep hyperscale data centers operating around the clock. As AI workloads surge, Vertiv’s precision-cooling and backup-power technologies have become essential to maintaining uptime. While its dividend yield is modest, the company’s reinvestment strategy supports growth in the expanding data-center market. 

Williams Companies (WMB): Williams operates one of the largest natural-gas pipeline networks in North America, supplying the cleaner energy that powers both industry and data centers. Its infrastructure supports consistent cash flow and an attractive dividend yield, positioning it as both a traditional income holding and an enabler of the AI-era energy build-out. 

While these companies don’t design semiconductors or run AI models, they build and maintain the systems that help make those innovations possible. Collectively, they offer a blend of dividend income and participation in the digital era.

Microgrids: The Emerging Industrial Layer

An emerging concept in industrial energy, the microgrid is a localized, self-contained system that can operate independently from the main grid. Microgrids integrate multiple energy sources, including solar, battery storage, and traditional generators, to provide reliable, efficient power for campuses, hospitals, military bases, and, increasingly, data centers.

While many data centers aim to incorporate renewable energy, the current reality is that wind and solar can meet only a fraction of their enormous power needs. Modern hyperscale data centers consume between 50 and 100 megawatts of electricity, roughly the same amount used by 80,000 U.S. homes. That level of demand makes full reliance on renewables impractical. For example, generating just 10 megawatts from solar would require about 25,000 panels spread across 40 to 50 acres—nearly 35 football fields—and only produces power when the sun is shining. Wind faces similar challenges, operating intermittently and requiring dozens of large turbines to deliver continuous output. 

For this reason, most data centers are turning to hybrid microgrids that blend renewables with natural-gas or diesel generation, battery storage, and traditional grid connections. These systems provide the flexibility and reliability needed for 24/7 operation while still incorporating cleaner energy where possible. 

As AI adoption accelerates, uptime and energy continuity have become critical. Microgrids offer resilience against outages, grid congestion, and volatile energy costs—an increasingly important advantage as demand for computing power expands.

Several of our holdings play direct or supporting roles in this evolving space. Cummins and Caterpillar produce advanced generators and energy-storage systems tailored for microgrid environments. Emerson Electric supplies the automation and controls that synchronize distributed power sources. Vertiv designs the power-distribution and backup systems that make microgrids viable for high-density data centers. Williams Companies provides the natural-gas infrastructure that fuels the generation side of these systems.

Microgrids represent an important step in the modernization of industrial America. They combine technology, energy efficiency, and reliability. While not yet mainstream, they are gaining momentum in sectors where power stability and cost management are essential. For long-term investors, the companies developing these systems are helping power the next phase of digital growth, one built on resilient, intelligent energy.

Perspective and Patience: Navigating the AI Spending Boom

Amazon founder Jeff Bezos recently described the current wave of AI investment as a “bubble that will pay off.” As summarized by Bloomberg, Bezos noted that, while capital is flowing quickly and sometimes ahead of fundamentals, the resulting innovation could lay the groundwork for long-term gains.

According to Bloomberg’s report:

• Bezos said the surge in AI spending resembles an “industrial bubble” that may lead to some failed investments but ultimately leave society better off.
• He noted that investors often struggle to distinguish between good and bad ideas in periods of technological excitement, with companies being funded before they have a product.
• He emphasized taking the long view, arguing that once the dust settles, the societal benefits from AI could be enormous. 

Brian Wesbury, chief economist at First Trust Advisors, offered his own perspective in an October 3 post on X: 

I don’t disagree with Bezos at all. The problem is how few people remember 1999. The fiber that Worldcom laid changed everything, but Worldcom went bankrupt. The Palm Pilot was the precursor of the iPhone, but 3Com went bankrupt. Yes, the future is bright, but markets have priced in that brightness awfully early. It’s possible that investors will have patience at these bubble prices to wait for the benefits (profits) of our current push into AI to show up. And, it is possible that the Fed will keep cutting rates and printing money and holding up asset prices with new money. But what that does is juice inflation. And inflation reduces the value of those future profits. Bubbles can persist for a long time, but they are still bubbles.

Wesbury’s message is worth considering. Innovation cycles rarely move in straight lines. Excitement can run ahead of earnings, just as it did during the dot-com era. But the technologies born from these periods—fiber optics then, AI infrastructure now—can still transform industries long after early investors lose enthusiasm. 

For investors, perspective and patience remain important. Markets may overshoot expectations in the short term, but innovation often compounds in the background. There can be opportunity staying invested in durable businesses and the infrastructure positioned to outlast the initial wave of excitement.

Staying Grounded: The Importance of Diversification

As long-term investors, our goal isn’t to time bubbles or chase every trend. It’s to combine innovation exposure with quality, income, and discipline. Many of the companies we own share a common foundation: strong balance sheets, consistent dividends, and tangible assets that can help smooth the path through periods of market volatility.

We believe diversification remains as relevant as ever, both within the equity portfolio and across asset classes. In addition to stocks, we continue to value the role of cash reserves, fixed income, and precious metals as long-term hedges against uncertainty.

The AI era is reshaping industries, but it still depends on physical power, machinery, and engineering. The modern digital gold rush will have winners and casualties, but those supplying the tools—the modern picks and shovels—may deliver progress for years to come.

As always, we’re here to help you navigate what’s next. If your financial situation has changed—or if you have questions about your investment portfolio—please don’t hesitate to call us at (800) 843-7273.

Warm Regards,

 

 

 

Matthew A. Young
President and Chief Executive Officer