GOOGL - Google

[Graham Osborn]

For anyone interested: I did a back-of-the-envelope DCF analysis for GOOGL which is attached.  I tried to be conservative on the growth projections relative to the typical DCF assumptions (I assume the company vanishes after 2050 and stops growing in 5-10 years) but we all know even these assumptions could be vastly overoptimistic.  Counteracting this, constant-currency growth is actually better than presented here.  Now, one can consider the discount rate here as the variable.  I plugged in the rate that I found justified the current stock price, which turns out to be (coincidentally or not) somewhere in the ballpark of high-to-medium grade corporate bond yields.  You can have fun messing with the discount rate.

 

I have to say this analysis makes me a bit less bullish on GOOGL than I was initially.  You really have to buy into the idea that yields go lower or at least remain low for a while.  OTOH, a small decline in yield coupled with a bullish outlook could translate into a big gain in the common.  You decide, thoughts welcome.

GOOGL.xlsx

[fareastwarriors]

Google's Self-Driving Car Project Is Losing Out to Rivals

http://www.bloomberg.com/news/articles/2016-09-12/google-car-project-loses-leaders-and-advantage-as-rivals-gain

[TorontoRaptorsFan]

Google's engineers are brilliant on the software side. Terrible when they handle any hardware business (Nest, Robotics, Driverless Cars).

They should have licensed their driverless car technology out a couple of years ago. They would have made a killing!

[whiterose]

A Matter of Opinion: Google's Stealth Attack on Travel:

Google poses the biggest long-term threat to the profitability and growth of airlines, hoteliers and travel intermediaries that they have ever seen

 

https://www.linkedin.com/pulse/matter-opinion-googles-stealth-attack-travel-bobby-healy

[fareastwarriors]

Google's engineers are brilliant on the software side. Terrible when they handle any hardware business (Nest, Robotics, Driverless Cars).

They should have licensed their driverless car technology out a couple of years ago. They would have made a killing!

 

more hardware

 

 

Behind the Pixel: Google’s First Real Threat to Apple’s iPhone

http://www.bloomberg.com/news/articles/2016-10-04/behind-the-pixel-google-s-first-real-threat-to-apple-s-iphone

[TwoCitiesCapital]

Google's engineers are brilliant on the software side. Terrible when they handle any hardware business (Nest, Robotics, Driverless Cars).

They should have licensed their driverless car technology out a couple of years ago. They would have made a killing!

 

more hardware

 

 

Behind the Pixel: Google’s First Real Threat to Apple’s iPhone

http://www.bloomberg.com/news/articles/2016-10-04/behind-the-pixel-google-s-first-real-threat-to-apple-s-iphone

 

I ordered the pixel phone myself. Long-term Android user here, but have never had a straight Android phone (Nexus line) nor have I ever used Google's hardware. I'm excited about the phone, but am a little concerned about the hardware being done by Google too.

 

Understandably, they haven't been known for hardware excellence in the past and I've been really content with the Samsung Note 4 that I've had the past two years. The only reason I'm doing the Pixel instead of the new Note is because I wanted to try unadulterated Android and because of the batter issues that Samsung is currently having. 

 

Will report back if it's awesome or awful.

 

 

[Jurgis]

Looks like Pixel is Project Fi phone: https://fi.google.com/about/phones/ - so get the Fi service if you're getting Pixel.  8)

[TwoCitiesCapital]

Looks like Pixel is Project Fi phone: https://fi.google.com/about/phones/ - so get the Fi service if you're getting Pixel.  8)

 

Already planning the transition. Most of the highly traversed parts of Manhattan are covered by free, city provided WiFi so nearly 100% of my data needs should be covered by that and other WiFi sources.

 

Looking to cut my phone bill by half while actually likely getting to use MORE data given the automatic/seamless transition to WiFi sources. Planning on starting off with a single Gig of data for those random times I'm out of the city, but expect most of that to be refunded each month.

$20-30/month for unlimited talk/text and mostly unlimited data seems like a steal for me from my current plan of $65/month for 2 GB which includes family plan and military discounts.

[Liberty]

Looks like Google Fiber is having problems:

 

http://www.recode.net/2016/10/25/13411182/google-access-executive-changes-craig-barratt

[Jurgis]

Looks like Google Fiber is having problems:

 

http://www.recode.net/2016/10/25/13411182/google-access-executive-changes-craig-barratt

 

Sucks for broadband consumers I guess.

[fareastwarriors]

Good story on Other Bets and Alphabetization.

 

https://www.bloomberg.com/news/features/2016-12-08/google-makes-so-much-money-it-never-had-to-worry-about-financial-discipline

Google Makes So Much Money, It Never Had to Worry About Financial Discipline—Until Now

Alphabet’s CFO Ruth Porat wants to bring focus to Mountain View. Can the moonshot factory adapt?

 

[TwoCitiesCapital]

Looks like Pixel is Project Fi phone: https://fi.google.com/about/phones/ - so get the Fi service if you're getting Pixel.  8)

 

Already planning the transition. Most of the highly traversed parts of Manhattan are covered by free, city provided WiFi so nearly 100% of my data needs should be covered by that and other WiFi sources.

 

Looking to cut my phone bill by half while actually likely getting to use MORE data given the automatic/seamless transition to WiFi sources. Planning on starting off with a single Gig of data for those random times I'm out of the city, but expect most of that to be refunded each month.

$20-30/month for unlimited talk/text and mostly unlimited data seems like a steal for me from my current plan of $65/month for 2 GB which includes family plan and military discounts.

 

Have the had phone for a month now - love it. And at least in NYC, Project Fi looks like a charm. Have used 20GB on Wifi and 1.6 on data. Total monthly bill is $42.

 

Dunno how big of a cut google takes from that or how they share it with Sprint/T-Mobile, but I'd definitely recommend anyone in NYC check it out since we have free public WiFi in heavily trafficked avenues/areas.

[SlowAppreciation]

Anyone have a white paper/analyst report on the cloud industry? Trying to find something that speaks to the pros and cons of AWS vs Azure vs GCS

[fareastwarriors]

Google’s Plan to Engineer the Next Silicon Valleys

 

The tech giant is quietly grooming companies overseas in a strategic move to bring the next billion online.

 

 

https://backchannel.com/googles-plan-to-engineer-the-next-silicon-valleys-8dc70735f00c#.k9inocqtm

[giofranchi]

I have opened a small position in GOOG yesterday. I think the recent small correction represents an opportunity to open a starter position in a great company that might still go on growing for a very long time.

If the correction in price goes on, I'll be glad to buy more.

 

eMarketer expects the online advertising market to grow at a CAGR of 14.5% for the next 4 years. And GOOG might be able to improve its share of that market from the current 41% to 50% more or less.

In my own businesses online advertising is practically the only kind of marketing we do. And we are planning to spend more and more every year in online advertising.

 

Cheers,

 

Gio

[Aurelius]

After doing some reading up on GOOG (I’ll provide some links at the end of this post) I’m really intrigued to hear why, perhaps, you don’t own it in your portfolio?

What do you/Wallstreet think is the bear case?

 

GOOG is selling at $863. Earnings estimate for 2017 year is $33.3. PE2017 = 25.9.

Earnings are, as I understand it, almost exclusively coming from search and they are growing at something like 20%.

 

Last year “Other bets” lost 3,6B, i.e. EPS got penalized by $5.15 per share. It seems conservative to value Other bets at zero - free option at no cost. In that case we need to add back $5.15 to EPS. Now GOOG is selling for 22.4 times 2017 earnings.

 

As we know GOOG has a very strong balance sheet. After adjusting for appr. 96B net cash after tax GOOG sells for 18.9 times earnings.

 

On top of this earnings are being penalized by heavy R&D expenses - 14B in 2016. GOOG is taking some pain today, for future gains. Another way to think about this expense is: lower returns, but greater durability of the earnings power. I think it’s fair to say that GOOG’s earnings power > EPS.

 

Alphabet hasn’t disclosed the financials of Youtube yet, but we know it’s growing very fast and that Google is focused on growing the business rather than maximizing profits. Youtube is the second most visited website in the world. I have to say for my part Youtube is the number 1 place I go to watch stuff. There is so much on there, no matter your interests. I highly rate services like Netflix, HBO and PrimeVideo, but I could do without out each of them as they substitute each other pretty well. Youtube has no substitute. Of course this is my personal opinion, but I suspect many feel the same.

 

GCP is also growing very fast. In 2015 Urs Hölzle (at the time cloud boss) commented: "The goal is for us to talk about Google as a cloud company by 2020".

Andy Jassy, AWS CEO, has mentioned he thought cloud would not become a winner take all market, but also mentioned there wouldn’t be many players due to the scale required.

Bezos wrote in his 2015 AR “Similar to the way I think about Amazon retail, for all practical purposes, I believe AWS is market-size unconstrained”. Before that Bezos has been quoted as saying that in the fullness of time AWS could become bigger than the retail business. I think this was all the way back in 2012.

I recently saw an CNBC interview with Bill Miller where he mentioned he had spoken to Bezos and asked him about the addressable market of AWS. Bezos had replied “Trillions”.

 

I think we can establish that cloud computing is a big opportunity. According to Gartner it has become a race between AWS, Azure and GCP. (https://www.gartner.com/doc/reprints?id=1-2G2O5FC&ct=150519)

 

Yesterday I read GCP boss Diane Greene saying: “"I think we have a pretty good shot at being #1 in five years," senior vice president Diane Greene said. "I actually think we have a huge advantage in our data centers, in our infrastructure, availability, security and how we automate things. We just haven't packaged it up perfectly yet."

 

Summary on cloud: The addressable market is huge. Because of scale there won’t be many players. Already we are seeing the big players - AWS, Azure and GCP - pulling ahead and becoming leaders.  We are early in the game - Amazon did 12-13B last year in a trillions dollar addressable market. Diane Greene, GCP boss, believes GCP has an advantage and could be bigger than AWS in 5 years! Maybe Diane Greene is advertizing, but AWS is being valued at something like 200B today with a 13B run-rate. AWS might be doing 50B in 5 years. GCP doesn’t need to be number 1 in 5 years for shareholders to be rewarded.

 

I just started reading up on AI and machine learning as well. It’s really remarkable how important many people believe it is and will become in our lives. I won’t be commenting much on it here, as I haven’t read enough yet.

 

But here’s what Chamath had to say on Google: “And then the next most important company after that (he mentioned AMZN was the best company in the world) is Google, and the reason is because whatever happens in AI will be dictated by them. They are just such an order of magnitude further ahead.”

 

To sum up: GOOG is selling at 19 times 2017 earnings growing at 20%, with no value ascribed to potential very big businesses like Youtube and GCP. Also no value is giving to Other bets.

 

Quick dirty speculation on value in 3 years:

Search; growing at 15%, valued at 20 times: (26,8B*1,15^3)*20 = 815B

Youtube: 100B

GCP: 50B

Cash: 175B

Total: 1140B

Upside 90% (on the basis of 600B mkt cap)

 

I might be wrong, but it feels very conservative to value GCP & Youtube at only 150B combined in 3 years time. Also, no value is being giving to R&D, Other bets, and everything else GOOG is doing. 

 

To me Alphabet seems like a company that keeps getting more and more relevant in our lives, think search, cloud, youtube, AI, self driving, maps, etc.

 

On top of that they seem to understand the importance of thinking long term and investing in the future. Management seems great. They are making a tons of money, growing fast, while maintaining a very strong balance sheet.

 

This isn’t meant as an investment case. Rather it’s me being confused why this great company is trading so cheaply? What am I missing? Why aren’t you guys exited?

 

Here are some links:

VIC - Miser861 has written two cases on GOOG

http://www.valuewalk.com/2017/03/coho-capital-partners-2016-annual-letter/

https://wexboy.wordpress.com/2017/03/16/so-why-not-google-it/

http://www.barrons.com/articles/alphabet-citigroup-and-other-secret-value-stocks-1483446278

[KCLarkin]

They are making a tons of money, growing fast, while maintaining a very strong balance sheet.

 

This isn’t meant as an investment case. Rather it’s me being confused why this great company is trading so cheaply? What am I missing? Why aren’t you guys exited?

 

I ask myself the same question once a month. Here is the main issue. Especially for value investors. None of that strong balance sheet or free cash flow is available to shareholders. They are just hoarding cash. They don't pay a dividend. Shares outstanding increases substantially each year. Cash balance increases each year. In other words, their capital allocation is very poor. The company is run for the founders and employees, not shareholders.

 

Or as Glenn Greenberg puts it: "How much would you pay for a locked box thats got a fire hose pouring money into it but that you cant get into?"

 

--

Still, I think the strengths and valuation of the company outweigh this major weakness.

[KJP]

In other words, their capital allocation is very poor.

 

That might be a bit harsh.  They have done stuff like this:  http://www.nbcnews.com/id/15196982/ns/business-us_business/t/google-buys-youtube-billion/#.WP9Q5_nyuUk

 

I own Google but I don't post about it here because I have nothing new to say about it that isn't thoroughly covered elsewhere, such as in the links you posted.  So, it's not a lack of excitement, just a lack of useful information to share.

 

One concern I do have is that the effect of voice search (and getting the search results in audio format) on search advertising.  The Amazon Echo can't show display ads.

 

 

 

 

[KCLarkin]

That might be a bit harsh.  They have done stuff like this:  http://www.nbcnews.com/id/15196982/ns/business-us_business/t/google-buys-youtube-billion/#.WP9Q5_nyuUk

 

I stand by the statement. I purposely ignored acquisitions and other bets, since it is too early to tell (even for YouTube which was purchased 10 years ago). I'm only considering their use of free cash flow AFTER acquisitions and organic initiatives.

 

But you also need to consider Motorola and Nest when evaluating their M&A. They aren't Steve Ballmer bad but like most tech companies, they have a mixed record.

[clutch]

They are making a tons of money, growing fast, while maintaining a very strong balance sheet.

 

This isn’t meant as an investment case. Rather it’s me being confused why this great company is trading so cheaply? What am I missing? Why aren’t you guys exited?

 

I ask myself the same question once a month. Here is the main issue. Especially for value investors. None of that strong balance sheet or free cash flow is available to shareholders. They are just hoarding cash. They don't pay a dividend. Shares outstanding increases substantially each year. Cash balance increases each year. In other words, their capital allocation is very poor. The company is run for the founders and employees, not shareholders.

 

Or as Glenn Greenberg puts it: "How much would you pay for a locked box thats got a fire hose pouring money into it but that you cant get into?"

 

--

Still, I think the strengths and valuation of the company outweigh this major weakness.

 

I think people mistakenly associate Google's R&D spending (significant portion of their capital allocation) only with their moonshot projects.

 

Every day, they are trying to improve the services they provide with better back-end technologies (machine learning algorithms, infrastructure, security, UX, etc.). These efforts are not obvious to outsiders, yet they are strengthening their moat more and more...

 

 

[giofranchi]

They are just hoarding cash. They don't pay a dividend. Shares outstanding increases substantially each year. Cash balance increases each year. In other words, their capital allocation is very poor. The company is run for the founders and employees, not shareholders.

 

I've heard this many times before, but I am not sure I understand:

1) The founders are the largest shareholders: how could you run the company for the founders and not for shareholders?

2) As long as you have ideas to grow, to run a company for its employees might not be so bad after all: great employees lead to great ideas which in turn lead to great new products. New products that might earn lots of money for shareholders.

3) To pay a dividend and to buy back shares is not complicated stuff: if the founders thought it could be the best thing to do, they would be probably be paying dividends and buying back shares. Evidently, they think it is not yet that way. Just like Buffett doesn't pay dividends nor buys back shares.

 

Cheers,

 

Gio

[Liberty]

I've heard this many times before, but I am not sure I understand:

1) The founders are the largest shareholders: how could you run the company for the founders and not for shareholders?

 

It's very possible in such situations to run the company for the founders and not the other shareholders, since their interests can be different. They're multi-billionaires and more dividends or buybacks or more focus on ROIC won't materially change their lives, but it could make a difference to other shareholders.

 

Not saying they are or aren't, just pointing out that this can be the dynamic with large controlling shareholders.

[giofranchi]

I've heard this many times before, but I am not sure I understand:

1) The founders are the largest shareholders: how could you run the company for the founders and not for shareholders?

 

It's very possible in such situations to run the company for the founders and not the other shareholders, since their interests can be different. They're multi-billionaires and more dividends or buybacks or more focus on ROIC won't materially change their lives, but it could make a difference to other shareholders.

 

Not saying they are or aren't, just pointing out that this can be the dynamic with large controlling shareholders.

 

Ok, I get that.

I just don't get the reason why large and rich shareholders should choose a lower ROIC instead of a higher ROIC all else being equal... why should they choose to never pay dividends nor buy back shares and to just hoard cash, if they think they will never use all that cash?

 

Cheers,

 

Gio

[gjangal]

Google cloud is a serious player in a market that won't be winner take all. The move to cloud is still at its infancy and most likely will be an 3 player market AWS, Google and Azure. Only time will tell but google is making some good bets.

 

Pixel is also a bet on clean android without all the bloatware that samsung puts on its devices. They need to get their supply chain in order and push through more devices the channel and sign up more providers than just verizon

 

 

[KCLarkin]

I've heard this many times before, but I am not sure I understand:

1) The founders are the largest shareholders: how could you run the company for the founders and not for shareholders?

2) As long as you have ideas to grow, to run a company for its employees might not be so bad after all: great employees lead to great ideas which in turn lead to great new products. New products that might earn lots of money for shareholders.

3) To pay a dividend and to buy back shares is not complicated stuff: if the founders thought it could be the best thing to do, they would be probably be paying dividends and buying back shares. Evidently, they think it is not yet that way. Just like Buffett doesn't pay dividends nor buys back shares.

 

The simple fact is that they have $86B in cash and $105B in retained earnings. 82% of every dollar they have ever earned is sitting in a "bank account". Idle. Only 18% of earnings were reinvested in the business or used to acquire other businesses*.

 

How much better off would Apple shareholders be if Steve Jobs had listened when Buffett told him to buyback shares (when Apple was $30 per share split adjusted)?

 

--

* In fact, things are worse than they seem. Instead of paying their employees with this excess cash, they pay them with undervalued stock.