Summary: ON SALE
Share Price: $2712
Sticker Price: $13635
Is Google stock a good buy?
Alphabet is a multinational holding company founded 2015 and is headquartered in Mountain View, CA. The largest business under the umbrella of the holding company is Google which was founded in 1998 and is also headquartered out of Mountain View, CA.
In 2015, Google co-founder Larry Page announced Google and the brands that Google owned would fall under the new holding company Alphabet. The purpose for this restructure was to keep the other brands separate from Google.
The brands that fall under the Alphabet holding company include:
- Calico – Human health (by overcoming aging)
- CapitalG – Private equity for growth stage technology companies
- DeepMind – Artificial intelligence
- Fitbit – Fitness wearables
- Google – Internet services
- Google Fiber – Internet access: via fiber
- GV – Venture capital for technology companies
- Intrinsic – Robotics software
- Sidewalk Labs – Infrastructure through technological solutions
- Verily – Human health
- X – Research and development for “moonshot” technologies
- Waymo – Autonomous driving
- Wing – Drone-based delivery of freight
Google is the leading revenue generator of all the brands listed above. In this article, we’ll place emphasis on the Google review over the other brands.
Here is how Google makes money.
Google Services – Accounts for about 92% of revenue and was first introduced with Google Adwards in 2000. Most of the revenue is generated through advertising on platforms including Google Chrome, Google Adwords, Google Maps, Google Play, Google Search, and Youtube. Other sources of revenue under the services category include apps, in-app purchases, digital products, hardware, and fees from subscription services including YouTube Premium and YouTube TV.
Google Cloud – Accounts for about 8% of revenue and was first introduced in 2011. Google Cloud is a hosting environment competitive to AWS (Amazon) and Azure (Microsoft) where businesses can host their applications and data.
Both revenue channels are highly scalable. With online advertising, spending around the world was estimated to be about $378B in 2020 and is expected to reach $646B by 2024. That’s 70% growth in just four years. With Google Cloud, enterprise customers will pay hundreds of thousands on up to millions of dollars per year to host their applications and data.
Here are some of the companies that host with Google Cloud.
- Home Depot
- The New York Times
- Discovery Channel
- Goldman Sachs
Here is what the news has to say.
This article from ParkMyCloud states Google Cloud has about 7% of the hosting market. By comparison, Azure has 19%, AWS has 32%, and numerous small providers like Godaddy, Digital Ocean, Hostgator and more account for 42%. This same article also compares the growth rates of the hosting providers. In 2020, Google Cloud grew by 46%, Azure grew by 50%, and AWS grew by 32%.
This article from MarketWatch states that Google will create its own semiconductor chip. Although this new product offering may provide more profitability and control for Google, creating a competitive chip is no easy feat. This same article talks about Apple’s efforts to create it’s chip called the M1. Apple spent years on R&D and went through a multi-year legal feud with Qualcomm. Apple eventually came to the conclusion that some things are better left to other professionals. Taiwan Semiconductor Manufacturing Company (TSMC) builds all of Apple’s chips and looks like it will continue to do so for the foreseeable future.
This article from Zacks.com states that online advertising is expected to grow 22% in 2021 and Google, Facebook, and The Interpublic Group are all expected to benefit.
The article from oberlo states that compared to other search engines, Google has over 92%. By comparison, Bing has 2.3%, Yahoo has 1.54%, Baidu has 1.28%, Yandex has .68%, and the remaining small search engines account for 1.6%.
This article from fastcompany states that Google has 28% of the US ad spend market share whereas Facebook has 25% and Amazon has 10%. This same article states that in 2020, Google ad revenue grew by 46%, Facebook ad revenue grew by 48%, and Amazon ad revenue grew by 77%. Amazon ad spend is growing fast which is worth paying attention to.
Now let’s take a look at the 4 M’s.
MOS (Margin of Safety): Although the share price can be perceived as high, sitting at $2,712, investors should always pay closer attention to the sticker price (intrinsic value) which is currently $13,635. This shows that Alphabet has significant upside potential. Also, with a score of 16/20, the overall financials are very strong. To give you some context, only 3% of stocks in Tykr have a score of 16 or higher.
Meaning: As long as the internet remains, so will advertising, and knowing that Google has over 90% of the market share shows that Google isn’t going away. Aside from advertising revenue, cloud hosting is also another stable revenue generator and Google has proven to serve some highly reputable brands.
Moat: The revenue channels for Google are highly scalable but there are competitors to keep an eye on. With the advertising side of the business, Facebook and Amazon are the two companies to watch. Facebook is currently On Sale with a score of 17/20 and MOS of 72%. Amazon is currently On Sale with a score of 16/20 and MOS of 80%. With the cloud hosting side of the business, AWS and Azure are the two largest competitors and Microsoft is currently On Sale with a score of 18/20 and MOS of 80%.
Management: Sundar Pichai is currently CEO of Alphabet and subsidiary Google. He started his career as a product manager at Applied Materials and worked in management consulting at McKinsey & Company. He joined Google in 2004 where he led product management and innovation efforts on products including Chrome, Chrome OS, Google Drive, Gmail, and Google Maps. In 2014 he was a contender for Microsoft’s CEO position which eventually went to Satya Nadella. In 2019 he became CEO of Alphabet.
Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.
Revenue (Found on the Income Statement)
Revenue is increasing consistently which is a great sign.
Net Income (Found on the Income Statement)
Net Income is also increasing consistently which is a great sign.
EPS (Found on the Income Statement)
EPS is also increasing consistently which is a great sign.
Free Cash Flow (Found on the Cash Flow Statement)
Free Cash Flow is also increasing consistently which is a great sign.
Total Assets (Found on the Balance Sheet)
Total Assets have increased consistently which is a great sign.
Total Liabilities (Found on the Balance Sheet)
Total Liabilities have increased which is okay.
Total Debt (Found on the Balance Sheet)
Total Debt has increased significantly in 2020.
Total Equity (Found on the Balance Sheet)
Total Equity has increased consistently which is a great sign.
All the key metrics from the financial statements are increasing year over year which is a great sign. Honestly, I don’t see too many businesses that are this consistent. With the MOS, the financials check out. A score of 16/20 and a MOS are impressive. With the Meaning, we know online advertising and cloud hosting will be around the next 10 years. With the Moat, we do see a few other competitors including Facebook, Amazon, and Microsoft. All four businesses are poised for growth over the coming years. With the Management, Sundar Pichai has done an excellent job building great products that have increased revenue, as well as the share price of Alphabet. When I look at a CEO’s background, I like to see leaders with a background in project management, product management, investment banking, or management consulting. Project management requires you to understand a product and/or project and how it economically impacts a business. You’re on the front line and depending on your experience, you have to make key business decisions that can either make or lose a company millions of dollars. Product management requires you to build products that either increase revenue or decrease operational costs. Investment banking and management consulting require you to have a strong combination between business acumen, financial expertise, and data analytics. Pichai has both experience with product management and management consulting. He’s a perfect fit for CEO.
The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.