Stocks A to Z / Stocks G / Alphabet (GOOG)
No. of Recommendations: 12
With the recent price fall, Alphabet now makes a very large position in my portfolio, trailing only Berkshire (which is more than a half of my equity holdings). It was on my wish list for quite a while, and I took this year's price action as my opportunity.
ChatGPT is the news du jour, and I appreciate the discussion. I am wondering on how others view the firms prospects more generally.
My thesis is very simple --
(1) while somewhat cyclical in nature, Alphabet's key revenue and profit streams (advertising via Search, YouTube) will very likely not be supplanted within the next 5-10 years, even with regulatory interventions:
(2) while earnings have come back down to earth from the 2020-21 Covid-induced blip, and there has been additional spend for every dollar earned, Alphabet is earning money at a healthy rate comparative to price, given the very large haircut it received this year(e.g., P/E is currently sub 20):
(3) ChatGPT aside, there are still reasonable expectations of growth (e.g., based on analyst 2024 estimates, Alphabet would be trading at a hair over 15 p/e in 2024 if the price stays flat)*:
(4) The firm has taken a more mature approach to capital allocation as it has grown, and I see no Metaverse or equivalent boondoggle on the horizon:
(5) The firm still has a fortress balance sheet, with 2022 Q3 cash and marketable securities at $116 billion (effectively 10% of its current market cap): and
(6) While Search is still the big money maker, the firm has been successful in a number of diverse areas, and isn't stagnating (e.g., see Cloud growth).
*While I don't put too much weight on these projections, NASDAQ's consensus estimates for 2023 and 2024 are $5.08 and $5.85, respectively.
Given the foregoing, I don't see a lot of downside risk from here, and quite a bit of possible upside. Wondering how others see things.
No. of Recommendations: 22
Excellent points, I'll just add only brief comments:
(1) while somewhat cyclical in nature, Alphabet's key revenue and profit streams (advertising via Search, YouTube) will very likely not be supplanted within the next 5-10 years, even with regulatory interventions
One has to be really honest, close our eyes and try to come up with counter-examples, as to whether Google text search business could erode. In summary, I think it (virtually) can't. And I try again at least once each month. Natural language is how we have evolved to communicate and ask questions, and I think we always need the precision of language to formulate a question carefully. But the input device can change - we can ask with speech, but that will have no effect on how Google interprets and provides the indexed responses.
(2) while earnings have come back down to earth from the 2020-21 Covid-induced blip, and there has been additional spend for every dollar earned, Alphabet is earning money at a healthyy rate comparative to price, given the very large haircut it received this year(e.g., P/E is currently sub 20):
Google's earnings were extremely elevated last year with high margins. Now they have down. As a heuristic, given the inherent high gross margins of the business model, it can be useful to track growth using the sales, which I normally don't do. But this removes the noise. Google has been growing steadily, and the Price/Sales ratio at 4.4 is now similar to what it was around 2011 when it was particularly cheap. It averaged around 6.5 the last 10 years (requiring a one-off 47% rise to reach that average level). The question of suitable valuation of course relates to what we expect sales to be ten years into the future, but I'll get to that further below.
(3) ChatGPT aside, there are still reasonable expectations of growth (e.g., based on analyst 2024 estimates, Alphabet would be trading at a hair over 15 p/e in 2024 if the price stays flat)*:
Analysts look at earnings hopelessly short-term. Who cares what earnings will be in 2024. Who cares about 2025. What we want is a firm with durable earnings, for which we can ideally predict a lower bound for the earnings ten years away, and know that the firm will still exist in a healthy economic position, even if the earnings we can't be sure about, in 20 years. That is the basis of the Manlobbi Method (see Manlobbi's Descent) board.
For the long-term earnings of Google, I have the following thesis. This is not a complete explanation, but I think it contains a useful insight that I have yet to see expressed. Google is presently delivering ads *extremely poorly*. The targeting is pretty ridiculously bad. Even Alibaba's seem to be better, and that is not saying a lot. How often have you seen a Google ad that you actually want to click on.
If others agree with this, then what can be deduced? It follows that there is an enormous runway ahead for Google to connect people with products and services far more effectively from their information queries in the future. I am not thinking that it can get twice as good, but something like 3-5 times better. Rather than looking at product expansions, and geographic market share, I think that this is where Google's potential really is. Part of this requires making sure they have a strangle-hold on delivering the best search results.
The margins should be much higher, given what Google was earnings ten years ago and how much larger sales are. Shame on Google for this (if observing from a capitalist's perspective). However to their credit they do seem to be admitting this now and adjusting their staff.
(4) The firm has taken a more mature approach to capital allocation as it has grown, and I see no Metaverse or equivalent boondoggle on the horizon:
Yes this part is wonderful. They do conduct research for the sake of interesting future products, but it is not a large part of their revenue, and never was. It also produced gmail, in the past. They would have been better off not having these radical-to-the-sky random projects, but that is not a reason to scorn them if thinking more broadly. One did not know, in the last, the level of success they would have with such projects, and one still does not know what may come about in say 2035 from these lines of research.
I would state the logic for firms like Google and even Facebook (just their idea is ridiculous, but the concept of new product research fine) to do these research projects as follows: They have a huge network of customers, and can add the new products into their existing moat (network of customers). Imagine developing a product yourself that is completely perfect. Do you realise that no-one will use it? Having a third the planet in customers is not a bad advantage.
(5) The firm still has a fortress balance sheet, with 2022 Q3 cash and marketable securities at $116 billion (effectively 10% of its current market cap): and
Exactly. I always like to subtract the net cash from the market cap, and comparing earnings to this 'enterprise value'. For Google, the PE is about 15 if measured this way. (To show what this is economically realistic, note that they could do a 10% buy-back and the PE would indeed fall to this level precisely, with no change in the quote. Or they could pay out a 10% dividend, the quote falling by 10%, your pocket having that 10%, and the PE also resting at 15).
(6) While Search is still the big money maker, the firm has been successful in a number of diverse areas, and isn't stagnating (e.g., see Cloud growth).
I would not pay too much attention to Cloud. It is required infrastructure anyway, so it makes sense to allow other customers to use it in different ways given that it scaled. But it isn't as future-profitable as casually thought (and even literally it remains loss making) and I view it as a commodity. Amazon got ahead with this, but I think even for them it is a commodity that doesn't have a durable advantage.
- Manlobbi
No. of Recommendations: 4
Google is presently delivering ads *extremely poorly*.
I wonder how much control Google has over this problem. As I understand it a company can buy "ad words" that they want to be associated with. So if you search for roller skates Acme Products wants you to see an ad for their rocket-powered skates. Perhaps you aren't interested in that version, but Acme has outbid everyone else for that ad word. So while Google can do a great job of monetizing ad words the effectiveness of the result depends on what the purchaser does with it. A "two to tango" kinda problem. There should be a feedback loop so that Google can show Acme that the return on investment for their ad isn't great, but it is up to Acme to try a new ad (maybe knee pads and crash helmets?).
Rgds,
HH/Sean
No. of Recommendations: 1
Natural language is how we have evolved to communicate and ask questions, and I think we always need the precision of language to formulate a question carefully. But the input device can change - we can ask with speech, but that will have no effect on how Google interprets and provides the indexed responses.
If things go aural to any significant degree then it will change Google's revenue significantly. You're thinking 'ask a question, read multiple answers on screen.' Suppose it's 'ask a question, get the response by voice'. How does Google monetize that? By putting 3 ads in front of your answer? This is a (much) long term issue, but it's an issue. At least Alexa can order stuff from you, giving Amazon a chance to monetize your request (and get a marketing kickback from the manufacturer for putting him first in line.)
The targeting is pretty ridiculously bad
I guess I haven't seen much better elsewhere. My complaint is them littering the page with paid and often irrelevant text to the point where the actual request is inundated under a half dozen ads before you can find it. This makes the site far less useful and vulnerable to someone who can present satisfactory results without so much crap in the way. There is a sweet spot; Radio & TV have about 15 minutes of ads per hour, more and the audience disintegrates. Phone and computer box manufacturers passed the point of crapware to such an extent that Apple made ads about it and gave consumers clean machines. Google is over the line here.
they would have been better off not having these radical random-to-sky projects
I'll say. Some things, like g-mail were fairly obvious extensions. Others, like flying cars (oops, I mean self-driving) not so much. This is not a 'stick to your knitting' complaint, but if you have a knitting factory, don't build a steel mill to show how smart you are. Maybe Musk gets away with it, but it's rare, almost unique.
it [cloud] is a commodity that doesn't have durable advantage
I have wondered about this. I think there is enough stickiness and friction that changing vendors would be difficult for many. Amazon's big advantage may have been just in getting their firstest with the mostest. Momentum can do a lot for you, not forever, but almost nothing is.
No. of Recommendations: 3
"Others, like flying cars (oops, I mean self-driving) not so much."
It depends on how you view Google's core areas of competence. Self-driving isn't a natural extension of Google Search, but it isn't that far removed from the highly successful Google Maps, the failed venture, Google Glass, and some other ventures of which Google is a part.
My understanding is that the "self-driving" part is the more difficult aspect of the equation, not the "responsive car" part. For that reason I don't think it's a coincidence that both Apple & Google have attempted to make inroads in the nascent industry. I think its money well-spent on both their parts given the potential payoff.
