In my previous post I looked at Microsoft and I found company neutrally valued (there were some pros and cons and as I know company from investment side not too long I prefer cautious approach). Today we will have a look on Google / Alphabet. Not long ago I read a book How Google Works written by Eric Schmidt and I was positively surprised as it comes to approach to creativity. Truth to tell, everyone is using tons of Google Apps and there is no way that Google will not exist within 20-30 years. It is also interesting to read their IPO Letter (I love this sentence: We aspire to make Google an institution that makes the world a better place. Well you did it so far!).
Anyway, let’s come to business. First issue which struck me was which class of shares should I analyze. Well I found the answer quite simple – cheaper ones! OK, I will have no voting right, but does it really matter for long term small investor? I don’t think so.
First let’s have a general look on financials:
As we can see company is rapidly growing and in 2016 doubled versus 2012. As I look on consensus company is to double till 2020.
Alphabet is making money mainly on advertisements and truth to tell I don’t expect it to change significantly. On the other hand I think that ad market for Google will grow. Think about it – people are still using more and more e-commerce and Internet is winning with TV. Why should business deteriorate? Well some of deterioration is visible. Cost-per-click is going down (by 11%), but number of paid clicks is growing faster (32%). All in all it is good, but if this relationship deteriorates then results might grow not as fast.
Also Alphabet has many apps, which are not directly monetized yet. Imagine you are to pay $1 for Google Maps per month. Would you? Obviously! And there are many examples like that.
What I don’t really like about Alphabet is shareholders unfriendly policy. Company is not paying dividend and has share-dilutive policy. Company is issuing shares every year so that number of shares outstanding is increasing (1% per year dilution). OK, I understand this is a tool to attract best of the best, but I don’t like it. Think about it – if MSFT is buying back 2-3% of shares, and Alphabet is issuing then how much faster must Alphabet grow in the long term to compensate it?
Truth to tell – it is not strange that shares are growing when company is not paying dividend. I mean every company should growth if it is accumulating profits.
Let’s look on valuation:
P/E = 25.1
EV/EBITDA = 11.2
Well, valuation is comparable to Microsoft. The only difference is that Google is about to double, while Microsoft should increase by 50% in the same time. This shows that Google is cheaper than MSFT, but is not paying dividend. Difficult choice…
Summing up, there are obviously pros and cons in investing in Alphabet. I think that valuation is neutral/not very high and growth profile is quite attractive. The main problem is unfriendly shareholder’s policy…
Disclaimer: GOOG – no position