Is Google (Alphabet) worth an investment?
Opdateret: aug. 22
This is my fifth and final post about the FAANG stocks. In this analysis I will look into Google and determine if it should be part of your portfolio, and at what price it would be time to open a position.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
Let me first say that I know the company behind Google is called Alphabet, however throughout this analysis I will refer to the company as Google. Like everyone else on this planet, I have experience with Google and use it everyday. My phone also a brand that use the Android operating system, which I'm very happy about. Even though I like the company, I do not own any shares in Google and I will not be biased in this analysis. I just wanted to write so in order to give full disclosure.
It is hard to briefly explain what Google does. I believe everyone knows Google, hence I don't want to go into too many details about what hey do. Instead I will use the definition from Wikipedia that defines Google to be an American multinational technology company that specializes in internet-related services and products, which include online advertising technologies, a search engine, cloud computing, software and hardware. I believe that sums it up pretty nicely. Looking at the moat I believe that Google has a very strong brand moat. I mean, when you are going to do an online search, you are saying that you are going to google it. I don't see how a brand can get any stronger than that? You might also argue that they have a switching moat, as you most likely wont switch to another search engine and I also believe that I will stick to Android phones. However, what matters is definitely the very strong brand moat.
Their CEO is Sundar Pichai. He first joined Google in 2004 and became the CEO in Google in 2015 and the CEO of Alphabet (The holding company for the Google company family) in 2019. He has a degree in metallurgical engineering from India, a Master of Science in materials science and engineering from Stanford University and a MBA from Wharton School of the University of Pennsylvania. He started as a product manager, where he oversaw products such as Google Chrome, Google Drive and later Gmail and Google Maps. As a product manager he was known for recruiting, mentoring and retaining a great team, while being great at navigating in politics, which meant he was very well respected. He is also known for being strongly opinionated, while still letting people's opinion emerge before he gives his own. It is not only Google that appreciated Sundar Pichai, he was also rumored to become the CEO in Microsoft, while he has also been offered a top job at Twitter. When looking on how employees score him as a CEO, he is in the top 5% of companies with more than 10.000 employees. Needless to say that his results show that he indeed has the credentials to lead Google to success.
We have determined that Google has a huge brand moat. We really like the management as well. Now let us look into the big five numbers in order to see, if Google does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. Google has great numbers and fulfill the criteria of having a return of investment capital above 10 % in all benchmarks. This is exactly what you look for in a company, when looking at the ROIC.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. While they are not increasing from benchmark to benchmark, the numbers are still above the required 10 % and shouldn't keep you from investing in Google.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Once again the numbers are great. Even though the number decreased in the latest benchmark, it is nothing to be worried about as the numbers are still great and well above the requirement.
The Equity Growth Rate in all benchmarks are great once again. They are above the requirement of at least 10 % in all of the benchmarks. And while they are not necessarily increasing in all of the benchmarks, it isn't something that I would worry about. It is just good solid numbers that you would be happy to see in any company you invest in.
Finally we look into the Cash Growth Rates. Once again all the benchmarks are well above the requirements. They are very solid and steady. Investing in a company that consistently provide numbers like these, should make any investor happy.
Usually when I summarize the numbers for a company there are some concerns, or something that needs to be investigated or monitored. However, not in the case of Google. In all five numbers they fulfill the requirements in all benchmarks. It is remarkable and there is nothing really else to add, than based on the numbers I would be very comfortable in investing in Google. If you solely look at the numbers, nothing needs to be investigated or monitored.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Google, I can see that Google has 0,35 years earnings in debt, which is great.
Based on my findings so far, it is obvious that Google is a great company. However, no investments are without risk and Google do have a few risks as well. While I do not see competition from another company as a risk due to the strong moat, the risks come from Government. The largest risk are anti-trust / anti-monopoly investigations. Google has already been fined by the EU for breaching anti-trust rules and they are also part of the 499 page long report by the antitrust subcommittee of the House Judiciary Committee. It is impossible to know how these anti-trust investigations will affect Google but it is obviously something that needs to be monitored. Especially now when Lina Kahn has been appointed as the Chairperson of the Federal Trade Commission. Another risk is the rise corporate taxes, which is something I wrote about in this post.
All right, we have gone through the numbers, potential and risk regarding Google, and now it is time for us to calculate a price for Google. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a conservative EPS of 45, which equals the one in 2018. I chose a Estimated future EPS growth rate of 15 (which is usually the highest possible growth rate I use), Estimated future PE 30 (which the double of the growth rate, as the historically PE for Google has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $1.350, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Google at price of $675 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 65.124. The Capital Expenditures was 22.281. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, as the annual report just concludes that "capital expenditures primarily included investments in technical infrastructure". Hence, as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 15.597 in our further calculations. The Tax Provision was 7.813. We have 323,58 outstanding shares. Hence, the calculation will be like this: (65.124 - 15.597 + 7.813) / 323,58 x 10 = $1.772 in TEN CAP price.
The last calculation is the PAYBACK time. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 45,80 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $723.
I do believe that Google is a great company with a great management. You rarely see any company that lives up to all requirements in all numbers in all benchmarks. At the same time they have such a strong moat and a great management. If the anti-trust investigations or the raise of corporate taxes will make Google fall to price around $1.400, I would definitely open a position. Once there is such a big difference between the calculations, I would like to buy it a bit below the highest calculated price.
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