An Alpha-Bet To The Moon | Alphabet Analysis

Today’s topic is about Alphabet. Alphabet is a collection of businesses, the largest of which is Google. Google exist out of two big segments: Google Services and Google Cloud. Under Google Services you can find YouTube, Android, Google Search, Google Maps and etc… Google Cloud helps businesses utilize AI, data management and security. For the security part, Google recently signed an agreement to acquire Mandiant, a leader in dynamic cyber defense and response. The acquisition will complement Google Cloud’s existing strengths in security. Next to Google, Alphabet has a very diversified portfolio of companies. With companies in healthcare, smart home products, artificial intelligence, self-driving cars, venture capital and many more. So we can clearly see that Alphabet has a pretty decent moat.

One of the biggest drivers for the long term growth of Alphabet is within its name. Alpha-bet. Alpha is investment return above benchmark, and that is what they strive for. Alphabet bets on innovation through moonshots. One of these moonshots back in the day was YouTube and look at where it is right now. YouTube grew to one of the most profitable platforms in the world!

This strategy has been working. Over the last 5 years Alphabet stock price increased 3,75 times. Outperforming both the S&P500 and the Nasdaq.

Looking at the revenue over the last 10 years, we can see that Alphabet has very consistent growth. Averaging 20% revenue growth every year. Last year we could even see growth of at least 40%. What is even more impressive is that their net income is growing at double the speed of the revenue (88% yoy growth). This means Alphabet I getting more profitable and working more efficient than previous years.

We can conclude that Google is definitely a growth company. Which will important when we look at the valuations later.

Alphabet has around 20 billion dollars in cash. Keep in mind that next quarter cash will drop a bit because of the acquisition of Mandiant. The company has around 188 billion dollars in current assets which is bigger than the current liabilities. So they have enough money to pay their short term bills. Long term debt is only 12 billion dollars and this can get paid off anytime with the current cash Alphabet holds.

Opportunities

We now have a pretty solid understanding of Alphabet, but what are the current opportunities?

The first opportunity is the valuation. You might think that these valuations at Seeking Alpha look bad. But that is not really the case. Most companies that Alphabet is compared to, are not growing at the same speed or do not have a track record with consistent growth like Alphabet. A pe of 25 is pretty reasonable, when we understand that Alphabet is a quality company and is still growing very fast. It would be better to look at the price to earnings to growth ratio. Which gives us a value of only 0.28. The forward price to cash flow is also going down to 17, which is again pretty solid.

If we look at the last 10 years, we can see that Alphabet historically has been trading with a higher pe, than what it is currently trading at. Which might be another sign that the company is fairly priced.

The next opportunity that I see are the share buybacks. Alphabet’s free cash flow has been increasing last years. But interesting to note is that the repurchases of capital stock has been increasing at the same pace. Alphabet might be using a strategy to take a percentage of the free cash flow to use for buybacks and increase shareholder value. This benefits us as investors.

The last opportunity that I will discuss is the upcoming stock split in July. Alphabet will do a 1 to 20 stock split. This means that if I own 1 share of the company now, I will receive 20 shares in July. But the big catch is that the share price will also divide by 20. So overall I did not gain any money. The only thing that changed is that retail investors can buy the share more easily. Of course with Bux Zero we don’t have this problem since we can buy fractional shares. Not everyone has this, so there will be more buying pressure. Another catalyst is that Alphabet now has a chance to get added to the Dow Jones Index. Since the Dow Jones index is stock price weighted, a high stock price company would get a weighting that is too high compared to the other stocks. Alphabet added to the index will force people to buy Alphabet when they invest in the Dow Jones, so again an increase in buying pressure.

Risks

When there are opportunities, there will also be risks. One of the risks is competition. Alphabet faces a lot of competition and this can effect the business. To keep growing Alphabet will need to have investments in the business that will grant them new and disruptive technologies. This is also one of the reasons that Alphabet does not pay out a dividend. So far we have seen that Alphabet has been very strong in allocating capital and received extremely good returns on them.

The last risk that I want to discuss is a short term one. Since the war between Russia and Ukraine, Alphabet has stopped most if not all of their business in Russia. This will effect next quarter, we might see a miss on revenue and earnings. For now it is hard to predict how long the war might last and if the business in Russia will restart anytime soon at a normal pace.

Keep the risks in mind before investing and compare them to the opportunities and rewards.

My conclusion

How am I approaching Alphabet as an investment? I’ve been buying Alphabet very recently as we went into the war. At the current valuations I see very low downside risk. Alphabet has pricing power to get through higher inflation. They have net income margins of 30%, which is extremely high. And they are preforming outstanding on capital allocation. In my opinion, Alphabet is a buy in any kind of portfolio.

Disclamer: I do own shares of Alphabet. I’m not a financial advisor. Investing is your own resposibility.

Check out my YouTube channel for more: https://www.youtube.com/channel/UC74ascgDjOZzQXXCZGisQtw

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Thank you for the great analysis again @Frisoke

I had a small position in Alphabet but sold it after their latest earnings. The plan is to add it to my portfolio again soon, I’m also very interested in adding Amazon :smiley:

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thx super analyse

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Nice to read and thanks for writing the analysis!

I also have Alphabet in my portfolio. With the stock split I will buy more for sure.

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Your analyze is great :+1: thank you for that.

Currently not owning any Alphabet shares anymore.

Please take note, most of Alphabets revenue is from Ad-income (Adsense/DFP/Youtube)

Youtube is going up. Site ad-income will go down. After this Corona pandemic you will notice much more native advertising again. People go out, so less time on the internet. (This part I noticed myself as a webite owner).

What Alphabet is trying to do with its cloud services is an easy way to gain more income. Because billions of people already own email ID’s from them. G-drive, G Photos. However, they do have trouble, getting the B2B market. Amazon and MS are king there.

That said, there’s one more huge problem for Alphabet called the EU. Alphabets position in too big in terms of monopoly. I expect even more fines.

In the end I do expect Alphabet to go up just like every major tech company in the US. But I don’t expect it to be as fast as a rocket, more a train :laughing:.

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