Betting on Alphabet?
Betting on Alphabet
Thesis : Fast grower with highly volatile earnings with plenty of room to grow. Most of the thesis will be centered around digital advertising growth and its ability to mantain its moat in the search engine ecosystem business and ability to secure advertising revenue. The ecosystem growth story will be subject to perpetual flux, but the dominance of android OS and its versatile apps (Gmail, Youtube, Google Maps, Google Drive) leads to a formidable moat that is not easily disrupted and replaced IMHO. The side bets (periphery purchases and research projects, such as self-driving cars and other automated services.) are not the core focus but Google will have first right of refusal should the side bets succeed.
Alphabet, one of the top companies in my USD watch-list recently had a mini correction due to quarterly earnings miss as well as a recent flux in bad news triggering a sharp short off. The PE dropped towards the threshold I have for Growth At Reasonable Price stocks. One of the best companies and most closely followed stocks in the world is at slightly more attractive levels.
Whether the fabled Sell in May and Go away will be a self fulfilling prophecy and there will be future downward corrections, or the bullish run will continue, it is out of my competence to assess.
I will attempt to digest the lines of business and the Bets that google is undergoing, determine if I can assess the business profitability and trajectory in five years and longer, before initiating any bets into Alphabet. Facebook and Alphabet is mainly driven by advertising revenue, although IMHO the moat of Google entrenchment into modern lifestyles and habits is much stronger than Facebook. Nonetheless, Due Diligence must be conducted and I shall not let foolish naive optimism cloud over common business sense. Due to lack of ability to execute voting rights, Google C class share (at a cheaper price) will be the instrument of choice, should I proceed to initiate an position.
Balance Sheet Strength
Income statement
The key attraction to Google is its eye catching Profit margins and strong cash flow generation. Revenue growth is impressive considering its market cap and there is still largely potential untapped monetizable demographics not sufficiently exposed to the Internet. The amount of monetization data Google collects from its search engine, Google Maps, Google translate, Blogger and You tube channels is considerable. Nonetheless, Google has issues with containing cost of revenue as it scales up revenue growth, noticeably requiring the building up of OPEX, R&D (capex), Data center infrastructure as well as significant manpower costs in hiring talented and expensive developers.
Google notable has streams of other income from its smaller bets which appears to be highly volatile. From my experience with SilverLake Axis, there most likely will be prototypes, which are defective, usable but not yet available in market and most likely cash burning / loss making.
Earnings per Share growth is nonetheless impressive but can be easily manipulated. OCF and FCFE will be important to access the quality of earnings and cash flow.
Balance Sheet
The worth of digital assets is probably not very meaningful and earnings power (ROA, ROE) and cash flow (OCF, FCFE) will be more useful. Goodwill inflation and intangible assets is considerable in acquisition heavy companies (Multiple bets). The large cash position and low debt is probably the most striking factors. Smart acquisitions within its circle of competence will be an important criteria in ensuring the company will succeed in an environment of perpetual flux.
Cash Flow Statement
Operations => Strong and increasing but highly volatile.
Investments => Significant reinvestments into its company and building up asset base.
Financing => Paring down on its debt position.
Consolidated
Exchange rate highly volatile and may lead to significant earnings shocks. This will also affect the net change in cash position.
Lines of businesses
Porter 5 force
By the end of 2014, Google accounted for more than 31% of the global digital advertising market, generating a reported $38.42 billion in ad revenue. In other words, lots of companies are willing to pay lots of money to Google to put the right ads in front of the right consumer.
Buyers are not bound to long contracts with Google, and there is very little to prevent them from taking up ad space on a competing website. For example, a furniture company may determine it will sell more chairs and sofas by placing ads through Facebook than through Google, and it can actually complete that entire switch without having to move any physical assets.
Acquisition based story is a formidable difficult landscape to navigate. Not all of these have been successful. For example, the company purchased Motorola in 2011 to bolster the Android phone network, infamously leading to a $9.6 billion write-down. The much-anticipated Google Glass project was a flop as well, something angst-ridden shareholders point out while bemoaning Google's focus on nonadvertising income.) Google is expanding into new markets with Google Fiber, Google Glass and research into driverless cars.
It's very difficult for an Internet company to maintain supplier power. Bandwidth is too easy to access, Web design only requires moderate software knowledge, and the Internet is virtually unlimited in size. Web content is also remarkably cheap and easy to access; changing from Google to another website only costs the user a few seconds, and websites or companies paying for ad space could just as easily throw their ads on Amazon or eBay. Network externalities is core for this business, as the higher and more sticky the MAU/DAU, the stronger the moat Google will establish.
Competitive firms can't simply offer a search engine, however; Yahoo and Microsoft's Bing have definitively lost that battle for search engine hegemony. Other platforms, by contrast, such as Amazon and Facebook, offer search engine capabilities in conjunction with other services.
There are also regulatory risks. In September 2015, a Russian court found Google guilty of preventing competition and forcing vendors to preload devices with Google apps. Antitrust problems are always present for huge companies in relatively young sectors, and Google is no different.. In March, it was hit with a €1.5bn ($1.7bn) by the European Union over misusing its monopoly on advertising. In January, Alphabet was fined €50m (£44m) for failing to provide users with transparent and understandable information on its data use policies.
It's also possible that Google has overextended itself into too many competitive markets. Although it is much easier to be first rather than smarter than the others, diversify / diwosify and trying to be smart at all areas can backfire.
Potential Diwosify and Failed investments. Disappointingly, Google Glass is on hiatus, if not dead entirely, and millions worth of capital expenditure has been poured into futuristic technologies that may not pan out. The company may be relatively safe in the search engine arena – though competition clearly exists – but Google isn't yet a bully in these other spheres.These non-Google businesses include Alphabet-owned Waymo, which recently announced a self-driving car factory in Detroit, Michigan and Wing, a Google-owned drone delivery service that recently received FAA approval. In April, Softbank invested $125m in Loon, a Google-owned company that aims to expand internet access through high-altitude balloons.
Search Engines, apart from the network externalities, is not an exceptional strong moat. New entrants essentially only need to invest in the creation of search engine algorithms (sometimes called "spiders") and digital storage space, as well as the physical computers and electricity needed to carry out operations. Bandwidth and Internet content aren't difficult to come by, and there is an enormous pool of skilled technical laborers.
Google has struggled with internal worker turmoil over the past year, with employees organizing a walkout in November 2018 over sexual misconduct allegations and hundreds of employees signing a letter objecting to the company’s treatment of temporary contractors in April.
High manpower costs and OPEX/CAPEX. The company reported it added 4,600 employees to its payroll in the first quarter, now employing 103,459 people. Most analysts cautioned to keep an eye on Alphabet’s margins, after the company promised to continue spending heavily on capital expenditures, adding workers and other long-term investments in its previous report, which weighed on the stock.
Links
https://www.investopedia.com/university/google-porters-5-forces-analysis/
https://www.cbinsights.com/research/report/google-strategy-teardown/
https://www.theguardian.com/technology/2019/apr/29/google-alphabet-shares-quarterly-earnings
https://www.marketwatch.com/story/alphabet-earnings-google-juggles-good-investments-with-being-a-target-for-eu-fines-2019-04-28
https://abc.xyz/investor/static/pdf/2019_Q1_Earnings_Transcript.pdf?cache=ebdc584
Thesis : Fast grower with highly volatile earnings with plenty of room to grow. Most of the thesis will be centered around digital advertising growth and its ability to mantain its moat in the search engine ecosystem business and ability to secure advertising revenue. The ecosystem growth story will be subject to perpetual flux, but the dominance of android OS and its versatile apps (Gmail, Youtube, Google Maps, Google Drive) leads to a formidable moat that is not easily disrupted and replaced IMHO. The side bets (periphery purchases and research projects, such as self-driving cars and other automated services.) are not the core focus but Google will have first right of refusal should the side bets succeed.
Alphabet, one of the top companies in my USD watch-list recently had a mini correction due to quarterly earnings miss as well as a recent flux in bad news triggering a sharp short off. The PE dropped towards the threshold I have for Growth At Reasonable Price stocks. One of the best companies and most closely followed stocks in the world is at slightly more attractive levels. Whether the fabled Sell in May and Go away will be a self fulfilling prophecy and there will be future downward corrections, or the bullish run will continue, it is out of my competence to assess.
I will attempt to digest the lines of business and the Bets that google is undergoing, determine if I can assess the business profitability and trajectory in five years and longer, before initiating any bets into Alphabet. Facebook and Alphabet is mainly driven by advertising revenue, although IMHO the moat of Google entrenchment into modern lifestyles and habits is much stronger than Facebook. Nonetheless, Due Diligence must be conducted and I shall not let foolish naive optimism cloud over common business sense. Due to lack of ability to execute voting rights, Google C class share (at a cheaper price) will be the instrument of choice, should I proceed to initiate an position.
Balance Sheet Strength
Income statement
The key attraction to Google is its eye catching Profit margins and strong cash flow generation. Revenue growth is impressive considering its market cap and there is still largely potential untapped monetizable demographics not sufficiently exposed to the Internet. The amount of monetization data Google collects from its search engine, Google Maps, Google translate, Blogger and You tube channels is considerable. Nonetheless, Google has issues with containing cost of revenue as it scales up revenue growth, noticeably requiring the building up of OPEX, R&D (capex), Data center infrastructure as well as significant manpower costs in hiring talented and expensive developers.
Google notable has streams of other income from its smaller bets which appears to be highly volatile. From my experience with SilverLake Axis, there most likely will be prototypes, which are defective, usable but not yet available in market and most likely cash burning / loss making.
Earnings per Share growth is nonetheless impressive but can be easily manipulated. OCF and FCFE will be important to access the quality of earnings and cash flow.
Balance Sheet
The worth of digital assets is probably not very meaningful and earnings power (ROA, ROE) and cash flow (OCF, FCFE) will be more useful. Goodwill inflation and intangible assets is considerable in acquisition heavy companies (Multiple bets). The large cash position and low debt is probably the most striking factors. Smart acquisitions within its circle of competence will be an important criteria in ensuring the company will succeed in an environment of perpetual flux.
Cash Flow Statement
Operations => Strong and increasing but highly volatile.
Investments => Significant reinvestments into its company and building up asset base.
Financing => Paring down on its debt position.
Consolidated
Exchange rate highly volatile and may lead to significant earnings shocks. This will also affect the net change in cash position.
Lines of businesses
- GV and capitalG, two of Google’s investment vehicles
- Waymo, Google’s self-driving car initiative
- Verily and Calico, two healthcare subsidiaries
- Alphabet Access & Energy, which houses the company’s telecommunications projects and energy initiatives
- Sidewalk Labs, Alphabet’s urban innovation organization
- DeepMind, an AI research arm acquired by Google in 2014 that has the company develop neural networks
- Cybersecurity spinoff Chronicle, which focuses on security solutions for Google’s cloud business
- Project Loon, a subsidiary working to bring internet access to rural and remote areas
- Project Wing, which is developing an autonomous delivery drone service
- Google X, an R&D facility focused on “moonshot” technologies aimed at improving the world
Porter 5 force
By the end of 2014, Google accounted for more than 31% of the global digital advertising market, generating a reported $38.42 billion in ad revenue. In other words, lots of companies are willing to pay lots of money to Google to put the right ads in front of the right consumer.
Buyers are not bound to long contracts with Google, and there is very little to prevent them from taking up ad space on a competing website. For example, a furniture company may determine it will sell more chairs and sofas by placing ads through Facebook than through Google, and it can actually complete that entire switch without having to move any physical assets.
Acquisition based story is a formidable difficult landscape to navigate. Not all of these have been successful. For example, the company purchased Motorola in 2011 to bolster the Android phone network, infamously leading to a $9.6 billion write-down. The much-anticipated Google Glass project was a flop as well, something angst-ridden shareholders point out while bemoaning Google's focus on nonadvertising income.) Google is expanding into new markets with Google Fiber, Google Glass and research into driverless cars.
It's very difficult for an Internet company to maintain supplier power. Bandwidth is too easy to access, Web design only requires moderate software knowledge, and the Internet is virtually unlimited in size. Web content is also remarkably cheap and easy to access; changing from Google to another website only costs the user a few seconds, and websites or companies paying for ad space could just as easily throw their ads on Amazon or eBay. Network externalities is core for this business, as the higher and more sticky the MAU/DAU, the stronger the moat Google will establish.
Competitive firms can't simply offer a search engine, however; Yahoo and Microsoft's Bing have definitively lost that battle for search engine hegemony. Other platforms, by contrast, such as Amazon and Facebook, offer search engine capabilities in conjunction with other services.
Key risks
The technology and communications sectors are unpredictable; few saw
the sudden rise and collapse of BlackBerry, Nokia or Zynga, for example.
Threats from new entrants in unforeseen areas is a near-ubiquitous
element in the market.There are also regulatory risks. In September 2015, a Russian court found Google guilty of preventing competition and forcing vendors to preload devices with Google apps. Antitrust problems are always present for huge companies in relatively young sectors, and Google is no different.. In March, it was hit with a €1.5bn ($1.7bn) by the European Union over misusing its monopoly on advertising. In January, Alphabet was fined €50m (£44m) for failing to provide users with transparent and understandable information on its data use policies.
It's also possible that Google has overextended itself into too many competitive markets. Although it is much easier to be first rather than smarter than the others, diversify / diwosify and trying to be smart at all areas can backfire.
Potential Diwosify and Failed investments. Disappointingly, Google Glass is on hiatus, if not dead entirely, and millions worth of capital expenditure has been poured into futuristic technologies that may not pan out. The company may be relatively safe in the search engine arena – though competition clearly exists – but Google isn't yet a bully in these other spheres.These non-Google businesses include Alphabet-owned Waymo, which recently announced a self-driving car factory in Detroit, Michigan and Wing, a Google-owned drone delivery service that recently received FAA approval. In April, Softbank invested $125m in Loon, a Google-owned company that aims to expand internet access through high-altitude balloons.
Search Engines, apart from the network externalities, is not an exceptional strong moat. New entrants essentially only need to invest in the creation of search engine algorithms (sometimes called "spiders") and digital storage space, as well as the physical computers and electricity needed to carry out operations. Bandwidth and Internet content aren't difficult to come by, and there is an enormous pool of skilled technical laborers.
Google has struggled with internal worker turmoil over the past year, with employees organizing a walkout in November 2018 over sexual misconduct allegations and hundreds of employees signing a letter objecting to the company’s treatment of temporary contractors in April.
High manpower costs and OPEX/CAPEX. The company reported it added 4,600 employees to its payroll in the first quarter, now employing 103,459 people. Most analysts cautioned to keep an eye on Alphabet’s margins, after the company promised to continue spending heavily on capital expenditures, adding workers and other long-term investments in its previous report, which weighed on the stock.
Links
https://www.investopedia.com/university/google-porters-5-forces-analysis/
https://www.cbinsights.com/research/report/google-strategy-teardown/
https://www.theguardian.com/technology/2019/apr/29/google-alphabet-shares-quarterly-earnings
https://www.marketwatch.com/story/alphabet-earnings-google-juggles-good-investments-with-being-a-target-for-eu-fines-2019-04-28
https://abc.xyz/investor/static/pdf/2019_Q1_Earnings_Transcript.pdf?cache=ebdc584
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