Alphabet - Snapshot
Company Profile
Google’s business mainly comprises of three segments, Google Services, Google Cloud and Other Bets.
Google Services
Google Services' core products and platforms include Android, Chrome, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube.
Google Cloud
Google cloud products include Google Cloud Platform and Google Workspace.
Google Cloud Platform provides the infrastructure for developers to build, test, and deploy applications. Google Workspace collaboration tools — include apps like Gmail, Docs, Drive, Calendar and Meet.
Other Bets
Other Bets include emerging businesses at various stages of development, ranging from R&D phase to early stages of commercialization.
Other bets are investments which the Company is funding through its Cash Cow Ads business. These investments are not small considering that the Company generates operating losses of approximately $5 billion per year in the segment.
Despite this, other bets might be the Growth drivers of the Company in the years to come and it includes amongst others investments in autonomous vehicles (Waymo) and healthcare.
Segmental analysis
Google advertising – It includes Google search, YouTube ads, Google Network Members' properties – Revenue is up 43% in 2021 and has 2 year CAGR of 25%.
Google other – Generates revenue from Google Play, Hardware (Fitbit wearable devices, Google Nest home products, and Pixel phones), and YouTube non-advertising, including YouTube Premium and YouTube TV subscriptions - Revenue is up 29% in 2021.
Google cloud – Revenue is up 47% in 2021.
Other bets (internet and TV services, as well as licensing and R&D services)
The revenue growth in YouTube Ads and Google Cloud has been outstanding in the last few quarters with a positive momentum going forward in 2022, giving the Company the ability to further grow its revenue in the future.
Sundar Pichai, CEO:
Alphabet’s backlog increased more than 70% to $51 billion, most of which is attributed to Google Cloud.
More people are creating content on YouTube than ever before. Last year, the number of YouTube channels that made at least $10,000 in revenue was up more than 40% year over year.
We just hit five trillion all time views, and have over fifteen billion views each day globally.
Segmental profitability
Google services operating margin for 2021 is 39% compared to 32% in both 2020 and 2019. The high margin of Google services indicates Alphabet’s leadership position in the ads space and the high operating leverage of its business.
Google cloud has been unprofitable due to the investments made by the company to capture the sizeable market opportunity. However, its operating losses are trending downwards.
Ruth Porat, CFO:
While Cloud operating loss and operating margin improved in 2021, we plan to continue to invest aggressively in Cloud given the sizable market opportunity we see.
Financials
Revenue of $258B in 2021, up 41% - 2 year CAGR 26%.
Operating margin of 31% in 2021 compared to 23% in 2020.
Net income of $76B in 2021 compared to $40.3B of last year, up 89%.
EPS increased to $112 in 2021 from $58.6 in 2020, up 91%.
Return on Equity 32% in 2021 compared to 5 years average of 18%.
Operating cash flows are consistently higher than 100% of net income.
FCF of $67.1B in 2021 compared to $42.8B in 2020, up 57%.
$140B in Cash & Cash Equivalents Vs Long term Debt of $15B as at 31 December 2021.
$50 billion of common stock repurchased in 2021.
Culture and Leadership
Source: Glassdoor
Google is one of the best places to work, with the company winning several awards over the years. Glassdoor employee reviews of 4.5* and a 94% rating approval of the CEO demonstrates the great culture within Alphabet.
Insider ownership
Larry Page – BOD member – 3% ownership, 26.3% voting power
Sergey Brin – BOD member – 2.9% ownership, 25.3% voting power
Competitive advantages, Opportunities and Risks
Competitive advantages
Strong network of the Search Engine Business – As more people search on Google and as more websites are optimizing themselves to appear in the search engine, the product becomes better making it more valuable. The dominance and scale of Google search makes it ever harder for the business to be disrupted.
YouTube – First mover advantage - Strong Network effect – According to Q3 2021 earnings call, 2 million creators are now making money and building their businesses on YouTube.
Opportunities
Google cloud – continued momentum with Q4 revenues growing by 45% year-on-year basis. Industry is expected to grow from $445B in the current year to $947B by 2026 – CAGR 16%.
Even though Google cloud is currently unprofitable, we expect the segment to be a major growth driver of operating income in the future.
Sundar Pichai, CEO “For the full year 2021 compared with the full year 2020, we saw over 80% growth in total deal volume for Google Cloud Platform, and over 65% growth in the number of deals over a billion dollars.”
Google cloud ranks third behind Amazon’s AWS and Microsoft’s Azure in terms of market share. However, we believe this is not a winner take all market and the sizeable market of cloud computing will allow the Company’s segment to continue to grow.
YouTube and connected TV - Philipp Schindler, CBO “We continue to make inroads in unlocking TV brand budgets, and we’re still in the early innings of what’s possible with Connected TV”.
Investments in healthcare, AI and ML.
Autonomous vehicle technologies – Waymo.
Risks
Anti-trust investigations (eg. from 2017 to 2019 the company recognized European Commission fine charges of $9.5 billion).
Valuation
We will take 2 different approaches in coming to a back-of-the-envelope valuation. The first is based on P/E and the second by valuing each separate segment of GOOGL using EV/Sales multiple.
Method A: Expected EPS 2025
The Company is expected to grow its EPS at a CAGR of 12% from 2022 until 2025, which brings us to EPS of $175 earnings per share in year 2025. We assume that the Company, will be able to retain its current P/E multiple of 25.5. This is based on the fact that the Company is growing at multiple fronts (Cloud, YouTube, and Search) and the current P/E is still well below the Company’s 5 year average P/E of 34.5. Based on the above, the expected price of each share in 2025 is $4,451 which results in an expected IRR of 11.6%.
If by 2025 we see a multiple expansion to a P/E of 30, the expected IRR becomes 16.3%. We do not consider that a multiple expansion to a P/E of 30 is unachievable based on the company’s future opportunities and historic P/E average.
Method B: Sum of the parts valuation
Search and other Google network properties are maturing businesses when compared to the other segments and grew revenues at a 2 year CAGR of 21-23%. Assigning an EV/S multiple of 5.9 which is GOOGL’s 5 year average we get an EV of $1,066B.
For other services which include hardware, Google Play and YouTube subscriptions we assigned a multiple of 7.23 which is equal to Apple’s current EV/S. This brings us to an EV of $203B.
YouTube and Google Cloud grew revenues in the range of 46-47%. Assigning a multiple of 15 is considered reasonable given the growth of the two segments. This results to an EV of $721B.
For the sake of simplicity, other bets were not included in the valuation given that the segment contains emerging businesses which are still loss-making.
The sum of the above gives us an EV of $1.989B which translates to a stock price of $3,174. This is a 10.7% appreciation from the current levels.