The words Google and value investment seem an odd combination, but the Quarter-Three earnings report demonstrates that Alphabet (NASDAQ: GOOG) has become a value investment.

Once again, Alphabet (NASDAQ: GOOGL) is displaying a lot of the classic value characteristics. Most importantly, the search-engine giant is making a lot of money. Alphabet reported a net income of $21.02 billion (€18.15 billion) for 30 September 2017, a new high. That reversed the drop in income earlier this year; Google’s income fell from $20.70 billion (€17.88 billion) in March, to $19.34 billion (€16.70 billion) in June.

The other cash metrics were also good at Amazon; free cash flow was at $6.334 billion (€5.47 billion), and cash from operations was an impressive $36.21 billion (€31.27 billion) on September 30, 2017. Both those figures were up from June’s but down from those in March.

In March 2017, Google reported $37.93 billion (€32.76 billion) in cash from operations that fell to $36.21 billion (€31.27 billion) in June. Free cash flow fell from $7.04 billion (€6.08 billion) to $4.572 billion (€3.95 billion) in June 2017.

When Alphabet has a bad quarter, it still does great and makes a lot of money. That makes the good quarters extraordinary as some of the figures for 3rd Quarter 2017 demonstrate.

Google has $100 Billion in the Bank

The most extraordinary figure at Alphabet is cash and short-term investments which was $100.14 billion (€86.48 billion) on September 30, 2017. That’s right folks; Google has slightly more than $100 billion (€86.36 billion) in the bank.

What’s more extraordinary is the rate at which Alphabet’s bank account is growing. The company reported $94.17 billion (€81.32 billion) in cash and short-term investments in June 2017 and $83.06 billion (€71.73 billion) in September 2016. It added $5.43 billion (€4.69 billion) in cash and short-term investments during the third quarter of 2017.

This means that Alphabet is in position to make some high profile acquisitions; such as buying PayPal (NASDAQ: PYPL), Netflix (NASDAQ: NFLX), or Square (NYSE: SQ). Google would also be in position to expand research and development, or to issue one big dividend if it wished. Such fanciful notions as buying an automaker like Fiat Chrysler (NYSE: FCAU) are now within possibility at Alphabet.

Alphabet’s Revenues Exceed $100 Billion

Cash and short-term investments were not the only figure that exceeded $100 billion (€86.36 billion) for the first time at Alphabet. Google’s parent reported $104.60 billion (€90.33 billion) in revenue on September 30, 2017.

This continues Alphabet’s extraordinary record of revenue growth. Ycharts data indicate that Alphabet’s revenue has grown for every quarter since December 2012. That’s nearly five years of continuous revenue growth.

The great thing about Google from a value investor’s perspective is that unlike at Amazon (NASDAQ: AMZN), that revenue actually translates into income. Alphabet managed to achieve a 24.24% profit margin in third quarter. It also rewarded investors with a 14.52% return on equity.

Alphabet’s Great Business Model

All this justifies Alphabet’s business model, which is a large cash-generating business financing a holding company. The holding company buys or finances other business ventures that add to the whole.

As at Berkshire Hathaway (NYSE: BRK.H), Alphabet generates enough cash to ignore Mr. Market and concentrate on making money. That enables the company to invest in potentially lucrative activities that the market might discourage; such as research and development.

This is why Alphabet is able to sink vast sums into experiments like the Google Express delivery service and the Waymo self-driving cars. It also gives the time to wait for those long-term investments to pay off.

The center of that business is advertising, one of Warren Buffett’s favorite cash generates. Buffett owns newspapers for the same reason Google does search the advertising they sales generates (or used to generate) a lot of cash.

Most of that ad revenue; 81% comes from Google’s online network, CNBC reported in April. Sales from that network reached $17.4 billion (€15.03 billion) in April 2017 a 71% increase over April 2016. Total ad sales at alphabet rose 19% during the same period, reaching $21.4 billion (€18.48 billion).

The $16.4 billion Threat to Google’s Business Model

There is a $16.4 billion (€14.16 billion) two fold threat to Alphabet’s advertising-based business model out there that a lot of investors will not see coming. It is advertising fraud, and Big Business’s growing dissatisfaction with digital advertising in general.

Digital advertising fraud will cost brands $16.4 billion (€14.16 billion) world in 2017, the ad-verification company Adloox and The&Partnership predicted in April. That figure marks a 20% increase over the $12.5 billion (€10.79 billion); Adloox estimated that brands lost to fraud in 2016, CNBC reported. Not surprisingly this level of fraud is upsetting some major advertisers.

“In 2017, the bloom came off the rose for digital media,” Proctor & Gamble’s (NYSE: GG) Chief Brand Officer Mark S. Pritchard said at the ANA Masters of Marketing conference in October. “The reason is the huge waste in the murky, nontransparent, even fraudulent digital media supply chain.”

Pritchard was far from alone, Bob Liodice, the CEO of the Association of National Advertisers (ANA) was even more scathing in his remarks at the same event.

“Just 25% of CMOs’ digital media investment reaches target audiences,” said ANA CEO Bob Liodice alleged. “This atrocity represents more than $20 billion (€17.27 billion) of marketing waste, inefficiency and ineffectiveness.”

Proctor & Gamble Dumping Digital Advertising

Pritchard put his company’s where his mouth is by cutting P&G’s digital spending by $140 million (€120.90 million) in July, AdAge reported. An unverified report in AdAge claimed that P&G left YouTube entirely in March because of problems with ad fraud.

Even more worrying for Alphabet should be AdAge’s claim that P&G’s relative organic sales still showed strong growth after leaving digital. This means that Alphabet has some serious problems to fix with its digital advertising ecosystem.

Whether those problems are an opportunity; or a threat, remains to be seen. One opportunity for Alphabet here will be that more advertisers and brands will move to its network and cut out the middlemen who are the source of much of the ad fraud.

These troubles raise the possibility that advertising revenue is about to drop dramatically at Google. They also present an opportunity because more brands might turn to Alphabet’s in-house advertising solutions.

Despite all that Alphabet is a tremendous value investment because of the fantastic revenue growth and the incredible amount of cash it holds. Even with the potential advertising troubles, Alphabet is worth the $1,028.01 (€887.78) a share it was trading at on November 7, 2017. If you can afford this stock buy it because Alphabet should retain its value.

A slightly different version of this story aimed at American audiences previously appeared at Market Mad House.