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- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 2
Shouldn't Alphabet be trading at a similar mutliple to MSFT?
20 vs 38!.
No. of Recommendations: 7
I like GOOG quite a bit at these levels. Manlobbi recently put up a great post on future IV
The last earnings call is worth the time. They brought receipts.
No. of Recommendations: 2
Agreed. When you start digging in to google, its quite an amazing technology and deep science company with understated management, which has led to a perception they are behind the curve with AI. Nothing could be further from the truth and an opportunity exists to arbitrage that misperception. Similar, though not as extreme, to when Facebook changed its name to META and the world thought Zuck had lost his mind. The reality there was that mush of the AI and METAverse spend was going to improving advertising tools and the algo.
No. of Recommendations: 2
If alphabet grow their earnings at 12% over the next 3 years ($13.19) and have a 30 x multiple, that's $395 per share. Interesting.
No. of Recommendations: 12
Shouldn't Alphabet be trading at a similar multiple to MSFT?
20 vs 38!
From the opposing viewpoint, shouldn't Microsoft be trading at a similar multiple to Alphabet?
: )
As for the reason for the gap, a lot of people think Google's keyword search profits will fall a lot, and that's probably a little over half their profit. The less panicky among those people merely think that the LLM answers they provide instead will be very expensive to provide.
It would not be a big surprise to see Apple start defaulting to a different search method (somebody's LLM), and cut their payments to Google for default search placement. That would have a lot of repercussions: one time jump up for Alphabet profits followed by much slower growth? Lower search market share overall even? If one liked Alphabet for a trade, maybe a nice time to sell would be the price spike in the months after the earnings spike...
Jim
No. of Recommendations: 6
MSFT has traded in a PE range of 27 to 37 on a TTM basis for quite a few years. Using that range and forecasting EPS growth of 15%-20% you might expect the following.
TTM EPS : $13.64
EPS +15% : $15.68 @PEx27 = $423 @PEx37 = $580
EPS +20% : $16.37 @PEx27 = $441 @PEx37 = $605
Using an average you might expect EPS of $16.00 x PEx30 = $480 as a good baseline for 12 months from now. There is no question the stock is trading at very elevated levels (currently at $525).
tecmo
...
No. of Recommendations: 16
MSFT has traded in a PE range of 27 to 37 on a TTM basis for quite a few years.
Though true, this has been an exuberant bull market that has flattered large tech companies.
Remember that Microsoft's PE range (say) 2008-2014 was 8-25, average 12.6. At that multiple, the current price would be $172, not $524.
It's hard to decide what constitutes "normal", and I'm not expressing an opinion on that. But it's important to avoid the pitfall of overemphasizing what happened most recently just because it's recent.
Jim
No. of Recommendations: 0
Though true, this has been an exuberant bull market that has flattered large tech companies.
Remember that Microsoft's PE range (say) 2008-2014 was 8-25, average 12.6. At that multiple, the current price would be $172, not $524
And going back even further, it has traded above a PE of 60; so the range of possibilities is quite wide. A very true qualifier to my forecast would be
"assuming current market conditions continue"
tecmo
...
No. of Recommendations: 6
A very true qualifier to my forecast would be "assuming current market conditions continue"
That certainly covers it!
I remember my buddies and I tried to think up the broadest possible disclaimer to any statement. The winner was "For sales purposes only". We started putting FSPO at the end of documents.
Jim
No. of Recommendations: 11
What's interesting to think about with GOOGL is their powerful distribution. It's the reason that Perplexity, ChatGBT, et al are now introducing browsers. Similarly, one could make the case that google searches are now habitual for Apple users and even if they forgo the $20Billion GOOGL pays them, GOOGL searches will substantially continue on iPhones.
ChatGbt was introduced on Nov 30, 2022 and yet GOOGL search keeps growing. MGT is adamant that AI overviews, lens and AI mode when searching is actually additive.
Search is still the king: $54.2B (+11.7% YoY), over 56% of total revenue.
BUT:
YouTube Ads generated $9.8B (+13.1%), scaling well without pressuring margins.
Google Cloud came in hot with $13.6B, +31.7% YoY and a 20.7% operating margin.
Subscriptions (YouTube Premium, Google One, etc.) grew +20.3% YoY, now 11.6% of total revenue.
In terms of the DOJ, think about how MSFT was able to settle with the DOJ. GOOGL will doubtless appeal any negative remedy or outcome from the district court which will likely take years to resolve.
From AI overviews:
In 1998, the U.S. Department of Justice (DOJ) filed an antitrust lawsuit against Microsoft. A federal judge initially ruled that Microsoft had violated antitrust laws and ordered the company to be broken up into two entities, but this decision was later overturned on appeal. The DOJ and Microsoft eventually reached a settlement in 2001.
The settlement did not require Microsoft to completely remove its Internet Explorer browser from Windows. However, it did place restrictions on Microsoft's practices, including prohibiting the company from engaging in retaliatory behavior against PC makers who chose to distribute non-Microsoft browsers. The settlement aimed to promote competition in the software market and address concerns that Microsoft had been leveraging its Windows monopoly to disadvantage rival browsers like Netscape Navigaton
No. of Recommendations: 7
Search is still the king: $54.2B (+11.7% YoY), over 56% of total revenue.
Interesting comparison: The iPhone line is considered to be the single greatest product of all time, in terms of absolute net profit. It makes about $50-60bn/year these days.
Is Google search now the greatest service of all time, in terms of absolute net profit? Perhaps soon to become the biggest ever product-or-service?
Jim
No. of Recommendations: 6
If alphabet grow their earnings at 12% over the next 3 years ($13.19) and have a 30 x multiple, that's $395 per share. Interesting.12% would be pretty tame relative to recent EPS growth:
EPS EPS YOY REV REV YOY
Dec 31, 2012 $0.80 $46
Dec 31, 2013 $0.94 17.50% $56 20.59%
Dec 31, 2014 $1.03 9.57% $66 18.88%
Dec 31, 2015 $1.14 10.78% $75 13.62%
Dec 31, 2016 $1.39 21.95% $90 20.38%
Dec 31, 2017 $0.90 -35.47% $111 22.80%
Dec 31, 2018 $2.19 143.32% $137 23.42%
Dec 31, 2019 $2.46 12.49% $162 18.30%
Dec 31, 2020 $2.93 19.22% $183 12.77%
Dec 31, 2021 $5.61 91.49% $258 41.15%
Dec 31, 2022 $4.56 -18.74% $283 9.78%
Dec 31, 2023 $5.80 27.19% $307 8.68%
Dec 31, 2024 $8.04 38.62% $350 13.87%
2025 (est.) $9.93 23.51% $394 12.57%
The above is EPS and Revenue for Alphabet going back a bit, with analyst estimates for 2025 (half year of results are in). EPS CAGR has been over 20% for a healthy stretch now, sales growth has been more modest outside of the exploding Cloud business (a decent graphic:
https://www.reddit.com/r/Infographics/comments/1m7...). 2017 was a one off due to an impairment related to the Tax Act.
I don't know what a fair multiple should be, but Mr. Market is shaving off over several hundreds of billions of market cap (relative to GOOG's average or median P/E) on the expectation that this won't be close to a continuing story. There are risks (regulatory, pricing depreciation from the massive capex, the changing world of search), but I think there's a decent margin of safety here.
