GOOGL - Google

[KCLarkin]

This is a pretty good summary on my thesis for Google:

https://www.barrons.com/articles/facebook-google-an-irrational-price-for-growth-1519659988?mod=hp_Next&

 

 

[Liberty]

This is a pretty good summary on my thesis for Google:

https://www.barrons.com/articles/facebook-google-an-irrational-price-for-growth-1519659988?mod=hp_Next&

 

I wonder how they get an estimated 25% CAGR revenue growth for FB for 2017-2019?  ???

 

[gjangal]

they are most likely analyst estimates, easily available on the bloomberg  terminal or on reuters eikon.

 

Atleast for FB they seem to be reasonable estimates

[JayGatsby]

Product search:

Amazon seems to be winning big in respect to where shoppers start their search for products:

Google seems to be underinvesting in that area... not sure why. If I find a product on Google Shopping why can't I buy it easily with Google Checkout? They do a lot of cool things but it doesn't always feel like they have a unified strategy... ideas are launched and if they don't catch quick traction they just get forgotten. Seems like they'd be able to get small online retailers to sign up for Google Checkout (or just partner with Paypal) in an effort to hold (or gain) market share for those retailers vs Amazon. I bought something yesterday through Google Shopping and it's such a pain to order through a new store.

Looks like they've done exactly that! https://express.google.com/

[Liberty]

they are most likely analyst estimates, easily available on the bloomberg  terminal or on reuters eikon.

 

Atleast for FB they seem to be reasonable estimates

 

That'll be interesting to track. They grew 47.1% in 2017, so they'd have to grow significantly below 25% in 2018 and 2019 for this to be accurate.

[Liberty]

Waymo promo video shows some of what the self-driving car's sensors see:

 

[philly value]

they are most likely analyst estimates, easily available on the bloomberg  terminal or on reuters eikon.

 

Atleast for FB they seem to be reasonable estimates

 

That'll be interesting to track. They grew 47.1% in 2017, so they'd have to grow significantly below 25% in 2018 and 2019 for this to be accurate.

 

By 2017-2019 CAGR they mean growth rate from 2017 to 2019, in other words, 2018 + 2019 growth rate, not including 2017.

[Liberty]

By 2017-2019 CAGR they mean growth rate from 2017 to 2019, in other words, 2018 + 2019 growth rate, not including 2017.

 

That was an ambiguous way to write that, but ok.

[philly value]

For what it's worth, here is roughly how I think about GOOG. I like it, although I do not believe you can underwrite an explosive return owning it at today's price.

 

Trades at 20x 2018 earnings ex-cash, excluding Other Bets.

 

Core ad business should grow low to mid teens for 2019 & the next few years - let's say, on average, 13%.

 

In 5 years if you think this should be a market multiple, 17x forward earnings business, you earn the following:

 

13% Ad Rev Growth

0% Margin (Assuming Flat)

=> 13% Profit Growth/yr

+5% Earnings Yield Per Year (which unfortunately likely builds cash on the B/S)

= 18% Return before multiple compression

-3% Multiple (20x -> 17x, 15% decline over 5 years)

=> 15% return on the "Business"

 

~87% of the starting price of the stock is the business, the remaining 13% is cash that will end up earning 0%, so you earn ~15% * 87% = 13% per year.

 

This analysis ignores any value for Other Bets, effectively ignores any growth in Other Revenue (cloud, hardware, etc).

[kiwing100]

 

FYI,

 

Tilson's analysis on Google / Alphabet - dated 27 Feb 2018

 

http://www.tilsonfunds.com/TilsonGOOG.pdf

[chrispy]

During his Google talk when he presented the 2014 numbers he ended with something like, "looks like there is a good chance to double over 5 years and I should look more at this stock."

 

I think this is something we all are susceptible to... We love a company and understand all of these ingredients points but the stock used to cost less and currently isn't "cheap". As Fisher pointed out, there is a reason why great companies are not "cheap".

[chesko182]

thoughts?

 

http://www.gannononinvesting.com/blog/2018/3/4/omnicom-google-and-facebook-why-all-growth-stocks-end-up-in-the-same-place

[Liberty]

thoughts?

 

http://www.gannononinvesting.com/blog/2018/3/4/omnicom-google-and-facebook-why-all-growth-stocks-end-up-in-the-same-place

 

I've skimmed it. I think he may be underestimating how digital advertising is growing the overall advertising pie, in both depth and breadth.

 

Small advertisers that could never have bought TV or print ads can spend small amounts on targeted ads and measure they returns. Poorer countries that weren't typically targeted by the old ad agencies or had underdeveloped media with poor inventories can now also get in the advertising game with all the dynamically-priced online inventory.

[KCLarkin]

thoughts?

 

http://www.gannononinvesting.com/blog/2018/3/4/omnicom-google-and-facebook-why-all-growth-stocks-end-up-in-the-same-place

 

I enjoy his writing style. But his conversational style and napkin math does gloss over a few things with Google.

 

His starting point is free cash flow. This tilts things in favour of value stocks. Google is spending double the depreciation charge on CapEx. So probably half of the CapEx charge is for growth. Working capital also tends to hurt FCF for growing companies. This isn't a big problem for Google but it does add lumpiness to FCF. Finally, free cash flow doesn't expense stock compensation. This is a huge problem with tech companies. For those reasons, I prefer to start with earnings. If free cash flow is consistently lower or higher than earnings, I like to know why. But it is not my preferred valuation metric.

 

Starting with earnings, there are a few things skewing 2017 results. The changes in the tax code resulted in very high taxes for 2017. Google paid a very large fine in Europe. Google is also losing $3.4 B on "other bets". These are growth investments. In 5 or 10 years, these products are either going to be producing growth, profits, or they will be shut down. Gannon's premise is based on the TAM for advertising being a fixed market. To fit with this premise, I will give Other Bets $0 value and assume they will be shut down or profit neutral in five years. So I add back $3.4B to operating income. Based on these adjustments, GOOG is trading at more like 29x owner earnings.

 

Gannon also assumes that 15x is a fair multiple for a low growth company. However, one could easily justify 20x or even 25x as the terminal multiple. So I think he overstates the multiple compression. But he is right that underestimating multiple compression is the reason why growth investing tends to underperform. Let's assume 2-4% per year in multiple compression.

 

A much bigger concern is that he ignores both Alphabet's cash and the cash generated over the next 10 years. Assuming 10% earnings growth for the next 10 years, that could be well over $500B! The owner earnings yield is 3.4%. This is enough to offset the multiple compression. So let's call it a wash.

 

If 10% growth for the next decade is a reasonable growth estimate, then GOOG will return 10% per year. 10 year treasuries are 2.8%. According to most reasonable estimates, the S&P 500 is priced to return 6-8%. So Alphabet looks attractive on a relative basis. Even if GOOG only grows 5% per year, you will still do much better than a 10 year bond. So your downside risk is limited.

 

The biggest risk is poor capital allocation. If that $500B of cash is wasted or just sits on the balance sheet, you could get less than 5% returns.

 

But most of the uncertainty seems to be on the upside. The company could easily carry some moderate debt. So it's conceivable that the company could return 100% of the current market cap in dividends and buybacks over the next 10 years. Bets on cloud computing and self-driving cars could create the next wave of growth. Some of the venture capital investments could payoff. Above average growth might continue past 10 years, resulting in much lower multiple compression than anticipated. Margins could be improved as growth slows.

 

So the odds of beating the S&P 500 are very high. Will it meet Gannon's 15% hurdle rate? Probably not.

 

 

 

 

[Broeb22]

I'm also not sure I buy Gannon's market share numbers for Google/Facebook. He cites 40% market share of global ad spend. Using eMarketer's estimate of $584BN in global ad spend in 2017, GOOG/FB's combined ad revenue is still $135BN, or 23% of global ad market share (maybe this % would be higher ex-China). Still if 23% is closer to the right number than 40% is, as Geoff cites, then GOOG/FB could take 70% share and triple, which even Geoff admits isn't overly ambitious to assume.

 

Is Geoff citing U.S. market share or global market share? Its not clear to me.

[KCLarkin]

thoughts?

 

http://www.gannononinvesting.com/blog/2018/3/4/omnicom-google-and-facebook-why-all-growth-stocks-end-up-in-the-same-place

 

My other thought is that adding a few reasonably priced growth stock to a value portfolio adds some important diversification. Over this market cycle, we've seen many famed value investors taken out on a stretcher because traditional value stocks have underperformed for so long. Yet, many wonderful growth stocks have sold at very reasonable valuations at different points over the last few years.

 

Adding Google at a 10-12% expected return might drop the return potential of a deep value portfolio, but it should help smooth out the return profile.

 

I just wish I had come to this conclusion earlier, as I've missed many attractive opportunities well within my circle of confidence because I didn't think they would meet my 15% hurdle unless valuations remained high.

 

[philly value]

I'm also not sure I buy Gannon's market share numbers for Google/Facebook. He cites 40% market share of global ad spend. Using eMarketer's estimate of $584BN in global ad spend in 2017, GOOG/FB's combined ad revenue is still $135BN, or 23% of global ad market share (maybe this % would be higher ex-China). Still if 23% is closer to the right number than 40% is, as Geoff cites, then GOOG/FB could take 70% share and triple, which even Geoff admits isn't overly ambitious to assume.

 

Is Geoff citing U.S. market share or global market share? Its not clear to me.

 

GOOG's market share of *digital* spend ex-China is low-40s%, I would imagine that is what is being discussed (if not, it's simply way off). Total digital ad spend ex-China as a % of total ad spend (digital + non digital) is also roughly 40%, meaning Google's market share of total ad spend ex-China is something like mid-teens %.

 

The past few years, GOOG + FB have basically captured ~100% of digital advertising growth, with GOOG holding market share constant in the ~40% range and FB gaining share.

[villainx]

My main thing with the Gannon write up is the pie growing. Or basically changing.  People use of technology is so dynamic.

[thowed]

I think Google is amazing, but this is the sort of thing that I worry may not be priced in.

 

https://www.bloomberg.com/news/articles/2018-03-08/josh-hawley-s-missouri-senate-bid-could-be-a-problem-for-google

[Liberty]

15-minute interview with Diane Greene, head of Google cloud:

 

https://www.bloomberg.com/news/videos/2018-03-08/google-cloud-ceo-diane-green-on-international-women-s-day-video

[stahleyp]

This might be a silly question, but when one has an ad blocker, does google count that when paying out to video creators on youtube? I read that these folks get $4,000 per 1 million views. I'd have to imagine a lot of people block the ads.

[mbreject]

I *think* they pay per impressions, so a view with an ad blocker wouldn't count.

[siddharth18]

This might be a silly question, but when one has an ad blocker, does google count that when paying out to video creators on youtube? I read that these folks get $4,000 per 1 million views. I'd have to imagine a lot of people block the ads.

 

Not at all. Digital ads on Google are priced either by click or by view (impression).

 

Google goes to great lengths to avoid charging the advertiser "invalid" clicks and impressions - typically clicks/impressions that are suspicious in nature. This would include clicks/impressions that are performed by bots, blacklisted IP addresses, malware, etc.

 

So there's no way advertiser would be charged for an obviously blocked ad.

 

Even if Google did charge for an invalid click or a blocked ad, the overall ad performance would drop which would lower advertisers' ROI on ad spend which would then pressure the ad prices downward. But knowing Google, there's no way in hell they would let that happen.

[stahleyp]

thanks guys that makes sense.

 

So is there a third party that verifies these or is all done with trust by google?

 

It's just so easy to get an adblocker and not get stuck watching these ads. I'm surprised google doesn't somehow block videos for those using adblockers (a lot of places are doing that nowadays) or not many people use adblockers to warrant the work to block videos (or, if google is the auditor...then there is a conflict of interest there).

[Contra123]

I thought I'd post this here:

https://ftalphaville.ft.com/2018/04/23/1524506401000/Is-Google-cheap-/

 

The above is a good read, IMO.  The authors are upfront and open about their assumptions and thought process that walks you from the current EV, market cap and GAAP EPS to their 'adjusted' P/E of 16.5x.  Quite often, you meet people IRL and online who will off-handedly quip that GOOG trades at a 'market' or 'below-market' (I assume they mean the S&P500 is the market) multiple of earnings or free cash flow, but don't really explain how they get to that.  That did not always sit well with me because if you take GAAP net income or if you follow the classic calculation of levered or unlevered free cash flow (e.g. treating stock-based comp as a real cash expense), I always got P/E or EV/uFCF multiples north of 30x, which isn't quite 'market' or 'below-market'.  I think GOOG is a fine business and the long-term result from a buy-and-hold approach to GOOG stock is likely to be satisfactory, but IMO saying the stock trades at a below market multiple is incorrect if one does not have the appetite to go into the level of granular discussion that the Alphaville article is engaging in, especially making some specific assumptions that GCP and Youtube are separable (in a SOTP sense) from the core business, and then valuing those components using some specific EV/Rev multiples.