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Regarding the high price, look at the price to sales compared to where it was historically:
https://www.macrotrends.net/stocks/charts/GOOG/alp...

Despite recent quote rises, it is no more expressive than it was on average the last ten years, but the sales kept rising with a 16% CAGR. That doesn't need to continue at more than 10% for the investment to be adequate from here.

Margins are about 'normal for Google' now after being inflated after Covid, so margins are unlikely to have any signifiant and lasting fall from here. From here over the next decade, price may simply roughly grow with the rate of sales in the vicinity of 10% per year.
https://www.macrotrends.net/stocks/charts/GOOG/alp...

I don't expect miracles but I do expect it to be very safe, bordering upon indestructible. There will be constant complaints about their excessive power but, other than China where Google has almost no sales, we live in neoliberalism (public policy run by business rather than business run by public policy) so nothing will likely actually happen that is highly consequential there.

My main insight as I wrote before is that the online advertising industry is more undeveloped than people imagine and has a long runway ahead to bring consumers to producers more effectively when they search for anything on the internet. They day you write in Google 'What is the very cheapest ticket to South Africa, making sure the plane sets off in the morning and arrives within 20 hours, and caters for vegetarians?'. There is actually a conclusive single answer, and the data is available, but Google cannot yet combine all those facts and just deliver lots of answers instead of one. When it gives the right answer, and that is extended to all commercial topics, the effectiveness of advertising may be a magnitude greater, so people will use Google much more.. the more they use search and the more frequently they reach a transaction (the two are multiplicative), the more sales will increase, and I believe Google have a long runway ahead as strange as that sounds given how large they already are.

Remember that search advertising is their main source of sales by far. If you want to have a good investment return, you will require higher sales per present user. This is because they already have market dominance in India, the Commonwealth countries, Europe and USA, so unless their sales per present user increases (as they say, their organic growth) they are not going to grow gross sales greatly, and thus with their PE of 30 on typical margins the present quote will not provided a great significant return. I do believe sales per user will increase as I expressed above, but you should not assume it blindly, or you should have signifiant other assumptions that permits substantial growth in sales and at the present high margins (diverting sales to cloud does not sustain margins).

Their cloud business is not significantly profitable so even if sales there hover in the 10-20% range of total sales, I have relatively little regard for the future profit itself being as important as analysts conjecture. I am not even sure how sticky cloud services are between providers. (I could move Shrewd'm to another server if reliable without it being a big deal, and whilst it is not Interactive Brokers I'm also just one person.)

Google's main business is advertising.

They can grow into other areas by acquisitions and investments but generally not with the same high margins that their advertising business enjoys, so they really need to keep growing advertising for you to do well as an investor. Don't have a convincing model for now they is possible? Then do not invest. The alternative is to just 'hang in with hope, following the others', as many do.

- Manlobbi

There will be constant complaints about their excessive power but, other than China where Google has almost no sales, we live in neoliberalism (public policy run by business rather than business run by public policy) so nothing will likely actually happen that is highly consequential there.

I would suggest that even that view of the modern world of neoliberalism isn't necessary to feel optimistic about their resilience.
Even during the heyday of antitrust actions, when big firms were actually dismembered, the investors in those firms (keeping the pieces) almost invariably did very well. Standard Oil, Bell.
And certainly antitrust actions that end up as damp squibs are also just fine for investors. IBM, Microsoft, and so forth.

In one sense, a business that gets attacked for being too successful is...generally a successful one.


If you want to have a good investment return, you will require higher sales per present user.

I would add one small refinement to that: higher sales per present user on a per-share basis.
They do make oceans of profit. It's possible that a lot of this could be used to drop share count a lot. Lately it has been dropping maybe 1.4%/year.
I am not that hopeful about the magnitude of the benefit of that endeavour, as the average price paid will probably be high and more shares will keep getting created for compensation.
But revenue and earnings per share would be higher after a few years even with flat user base and revenue per user, and there could be some benefit.

You're right that the easy growth from more eyeballs will hit limits.
I do think there is still a considerable of scope for increasing ad revenue, and not-quite-ad revenue, on a few fronts.
For example, YouTube Premium has gone from ~30m to ~130m paying subscribers in the last 3 years, an example of the broad category of earnings from being (in effect) their own content rather than the advertising add-on to the content of others.

As an interesting aside, my table further up the thread can be updated with today's price, which is of course 9% higher.
The assumptions no doubt have many errors, but for whatever it's worth, the same arithmetic would now suggest one might expect a return of inflation + 6.3% to end of next year, half what it was in the post.

Jim

When it gives the right answer, and that is extended to all commercial topics, the effectiveness of advertising may be a magnitude greater, so people will use Google much more

I agree entirely with your argument, but will point out the implicit assumption that Google will be the one to bring to market, either through in-house development or by purchasing/stealing whatever Lotus 1-2-3 or Netscape Navigator equivalent emerges from the underbrush in the next few years.

The most salient example I can think of off the top of my head of the opposite occurring is the Disc Operating System developed by the Microcomputer Software Company that IBM took a pass on in the early 1980s, ostensibly in favor of hardware. Oopsie.

Other last-generation examples of seemingly unassailable first-movers being outmaneuvered (or just plain slow): Kodak, HP, Gateway. Sears.

Otherwise (and assuming no pesky societal apocalypses in the meantime), agree entirely with your ain't-seen-nothing-yet argument

--sutton

<<If you want to have a good investment return, you will require higher sales per present user.>>
I would add one small refinement to that: higher sales per present user on a per-share basis.
They do make oceans of profit. It's possible that a lot of this could be used to drop share count a lot.

The proportionality is what matters here though. What is important is that advertising revenue must grow very considerably over the next decade if investors require a good return. If you don't have a model for how that is possible, then blind hope might not suffice.

It is true that buying back shares allows them to preserve their high margins (this is distinct from diverting earnings into low margin business as Alibaba did for example). However whilst Google is trading at a PE of 30 (an earnings yield of 3.3%) then, by definition, it cannot grow its earnings by more than 3.3% as a maximum bound. Think of their "variability" of growth from buybacks as ranging between 0% and 3.3% as a maximum boundary, and realistically the upper bound will be more like 1.5% given other things they want to do with their owner earnings. This 0-1.5% variability for EPS growth is more or less unimportant when we are wishing for 10%+ EPS growth as a whole and we require some of that 3.3% yield for buying competitors (whether supplementing its own earnings or killing them) to help with the advertising growth itself.

I should iterate the main idea that what is important for Google is to be able to grow its advertising revenue largely organically and avoid competitors taking attention (search time) away, as sutton pointed out, from its existing searches. I am more optimistic than most that this is possible, but those expecting a good return whilst also unsure about how advertising revenue-per-user can grow significantly should view that as a contradiction.

If Google traded at a PE of 10 it would much better for owners, as its buyback capacity would have the upper bound of 10% growth (say 5% in practice) growth in earnings instead of 1.5% as presently.

Google is very aware through - more so than most analysts based on most of the earnings calls - that its advertising business, however, isn't something that revolves around trying to extract dollars from the public as first order goal, but it should be second order. The main goal is to provide useful searches, period. The advertising has to be done tastefully and effectively but it is a secondary consequence of dominance in search, and whilst it might be easy to pass that off as a cliche, it is actually extremely important for Google to continue doing well. So a lot of its capital expenditure is in experimenting with different searches, and control of more data (I don't mean personal data but rather flight bookings, hotel bookings, street info, business locations (and eventually, their relative proven capabilities), and so on.

- Manlobbi

<<If you want to have a good investment return, you will require higher sales per present user.>>
...
I would add one small refinement to that: higher sales per present user on a per-share basis.
They do make oceans of profit. It's possible that a lot of this could be used to drop share count a lot.
...
The proportionality is what matters here though. What is important is that advertising revenue must grow very considerably over the next decade if investors require a good return. If you don't have a model for how that is possible, then blind hope might not suffice.
It is true that buying back shares allows them to preserve their high margins (this is distinct from diverting earnings into low margin business as Alibaba did for example). However whilst Google is trading at a PE of 30 (an earnings yield of 3.3%) then, by definition, it cannot grow its earnings by more than 3.3% as a maximum bound.

I mentioned that the progress should be measured on a per-share basis purely as a quibble, as it's a firm where the share count isn't a constant.
Buybacks and equity based compensation.

But personally I think the benefit is not even as optimistic as your description might suggest.
They might be able to reduce the share count by 3-4% a year, and earnings per share might consequently rise that much more than otherwise. They might reduce the share count by (say) 40% after many years, important for per-share valuation exercises.
But I doubt their entire buyback program adds much at all to the value of a share, if anything.

For those who don't follow: buybacks affect the value of a continuing share only to the extent that the purchase are done at prices far from true fair value.
If the shares are on average trading at fair value, the value of a continuing share doesn't change at all as a result of buybacks.
In order to do those purchases which increase EPS they're also reducing the company's value by 3-4% of market cap per year using up cash on hand to do the buys.
That cash goes out the door permanently, presumably reducing the company's total value dollar for dollar. It isn't going to continuing shareholders, and isn't any kind of "yield" for them.

As it happens, I think Alphabet's share price is somewhat below true fair value at the moment, so current buybacks are adding value to continuing shares.
But the benefit is probably so small that it's just another quibble: the percentage of shares repurchased (very small) times the percentage of undervaluation (also very small).

Jim

they really need to keep growing advertising

Which has clear limits in form of the ad budgets of businesses. From "The Economist":

Now, as the online share of total ad spending touches two-thirds, businesses have smaller non-digital ad budgets to eat into.

Sorry, I posted too quickly. Now finished reading the whole "The Economist" article I think it's very worthwhile reading for all on this board.

Original article:
https://www.economist.com/business/2023/07/30/is-t...

Non-subscribers:
https://archive.li/2uEnl

'Google's main business is advertising.

They can grow into other areas by acquisitions and investments but generally not with the same high margins that their advertising business enjoys, so they really need to keep growing advertising for you to do well as an investor.'

Watch: YouTube can grow to a $240 billion standalone asset, says SVB MoffettNathanson's Michael Nathanson

Interesting CNBC discussion-240B possible with YouTube. They see maybe 10M new YouTube TV subscribers over the next 3-5 years and it may become a huge media asset beyond their huge ad business and Comcast and Charter cords will continue to wither. FYI- The scuttlebutt from my middle school boys is that they enjoy the YouTube shorts and videos as much as playing their video games.

I imagine they are also underpromising their AI potential and will ultimately overdeliver results with their data, talent and thick wallet.

YouTube can grow to a $240 billion standalone asset, says SVB MoffettNathanson's Michael Nathanson


That sounds oddly conservative.
Wouldn't you think it's already worth that much or more?

$240bn is less than 15% of Alphabet's current market cap.
YouTube Ad revenue is about 1/5 as big as the "Google Search and Other" subcategory of revenues.
"YouTube Premium" subscription revenue is something like $12bn, which has essentially zero incremental COGS.
Unlike the global ad market as a whole, the video business has some room for potential growth.

Jim

"YouTube Premium" subscription revenue is something like $12bn, which has essentially zero incremental COGS.
Unlike the global ad market as a whole, the video business has some room for potential growth.

Firstly it might not look like it from watching videos, but YouTube is, whilst not exclusively, largely an advertising product as far as Google is concerned. More correctly, you are the product (you are sold to businesses by Google) and the businesses buying ads are the consumer.

Advertising revenue is 71% of the YouTube business at $30B, YouTube premium at 29% at around $12B.

In 2022, YouTube's advertising revenue accounted for approximately 11.35 percent of Google's total revenue at $30B.

What about running costs? As it happens they are absolutely huge - specifically for YouTube. The business isn't as good as text search.

According to a research conducted by Entourage Marketing & Design in 2019 which used figures from Statista and Business Insider, it is estimated that Google spends an approximate $5 billion per year in running YouTube. That analysis was 4 years ago - over that time YouTube ad revenue has doubled, so as a proxy, and catering for views and quality of video also multiplicatively growing, I would say costs have also doubled from $5B (if Enterage is right) to $10B.

YouTube costs: $10B
YouTube premium: $10B
YouTube ad revenue: $30B

If this is right, YouTube premium would not even cover costs without the advertising, and also has the problem of eating into ad revenue.

When you are a premium subscriber, you no longer contribute to Ad revenue for YouTube. So ditching premium wouldn't be as bad as it sounds financially. But it is valuable for other reasons - certain people just hate ads so would otherwise leave anyway if they didn't have an option to remove them.

YouTube is a good business but very costly, so less profitable than text search.

- Manlobbi

Knowing that Google's search dominance continuing indefinitely is outside my circle.

Posting this to hopefully develop my understanding.

Recently saw the Microsoft AI that will soon be added to Teams. Teams is becoming a one stop shop for a lot of office workers. Adding AI into Teams, that has access to all of an organisation's office files combined with web data, it becomes a powerful AI tool. There is a big difference between searching for car insurance v asking an AI questions. However, I could see myself using Google search less when in the office. I might just ask all questions to the AI in Teams.

Different for non office workers, or at home, Google search will still be dominant. If I am searching for car insurance on my phone it will be google via safari. But then that depend on the Apple contract.

Certainly enough change happening, for me to worry about the search market share being maintained. Granted, the TAM for online advertising may continue to expand offsetting any loss of share.

Google seem to be important in the education sector. Microsoft in office/organisations. Apple consumers. Microsoft and AWS dominate cloud. Cloud more capital intensive than search.

I have used GA4 for website tracking and can see how Google have their finger prints all over the web. This might be the barrier to keep Microsoft out. Anyone with a website needs Google to see what is working. And if you want to sell anything online you need to feature in Google search, the tool used by consumers to find goods and services.

I suppose the more I think about it, the implications of AI on Google search are that it will just make Google search better, enrich it and that will result in even more use.

Microsoft first mover advantage with ChatGPT seems significant but perhaps not. I don't know anyone using Bard other than myself as an Alphabet shareholder. Although I doubt ChatGPT becomes the AI verb that Google became.

According to a research conducted by Entourage Marketing & Design in 2019 which used figures from Statista and Business Insider, it is estimated that Google spends an approximate $5 billion per year in running YouTube. That analysis was 4 years ago - over that time YouTube ad revenue has doubled, so as a proxy, and catering for views and quality of video also multiplicatively growing, I would say costs have also doubled from $5B (if Enterage is right) to $10B.

YouTube costs: $10B
YouTube premium: $10B
YouTube ad revenue: $30B

Its pretty naive to think they aren't getting any operating leverage from YouTube.

YouTube is one of the gold-star assets at Google - and is arguably more valuable than Netflix ($160B valuation).

https://www.benzinga.com/analyst-ratings/analyst-c...

Users flocking to YouTube have put Hollywood and streaming giant Netflix, Inc. NFLX in a challenging position, as per Munster in an interview with CNBC. The total hours viewed on YouTube surpass those on Netflix by a factor of four, with 60 billion hours per month on YouTube compared to 15 billion hours on Netflix.

Munster noted, 'The reason is 20 and 30-somethings are embracing this creator economy, and this is really the crux of the challenge [facing Hollywood and Netflix]. The creator economy is user-generated content on steroids, and that's where and that's where all the viewing is going.'

tecmo
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