Google: A Wonderful Business Trading At A Discount


Google (Or Alphabet inc) is a 1.5T market cap company – But I still see growth ahead of it. Here's my DD.

We all know what Google’s main business is (Google Search), so here’s a quick breakdown of the alternate revenue sources for Q2 2022:

Search – $39.6B

Cloud – $5.8B

Youtube – $6.9B

Network – $8.2B

Other – $6.8B

As you can see, Google search contributes to over half of Google’s revenue, but revenues from Youtube, Network & Cloud are not insignificant either. Google isn’t falling behind the competition either, using nearly $10B on R&D per quarter. Google search has a massive moat, and as more of the world are getting online, I can not see Google’s search revenue declining. On the other hand, Youtube is eating up more streaming viewers from twitch, while Tiktok poses tough competition in the Youtube ‘shorts’ section. I still believe Youtube to be the premium video content platform. Google cloud has a roughly 10% market share in a fast-growing industry, expected to be worth roughly $83B at the end of 2022. Cloud is the third largest player in this sector, behind AWS (33%) and Azure (22%). Google is constantly innovating to keep its market share, and the moat is not eroding. Because of this, I believe Google is a wonderful business trading at a discount due to market conditions – Here is my estimation of Google’s fair value:

TTM FCF 65.19B

Assumptions

3% FCF growth

8% Discount rate

2% Terminal growth rate

10 years of projection

$184.92 Fair Value

$116.93 Price

38% Discount on Fair Value

*Always do your own calculations of fair value, I am not a financial advisor*

While the P/E (21.3) & P/B (6.0) may be high, making Google not a traditional ‘Value’ Investment, I feel it is fair to pay a small premium for a wonderful business, AKA a fair price for a wonderful business, as opposed to a wonderful price for a fair business.

For me Google is a long-term hold, as the management team has shown their competence, and I have high conviction in the performance of their products, as well as the business as a whole.

Google is also using cash flow in acquisitions, such as buying Mandiant for $5.4B, a cyber security company, as well as buying FitBit for $2.1B, a smartwatch company to further enhance the google suite of products. Fitbit is the 4th biggest company by market share in the wearables industry.

Here are the revenue & earnings growth for the last 5 years:

Revenue:

2016 – 90.27B

2017 – 110.85B

2018 – 136.82B

2019 – 161.86B

2020 – 182.53B

2021 – 257.64B

5 year Revenue CAGR: 23.7%

Earnings Per Share:

2016 – 1.39

2017 – 0.90

2018 – 2.19

2019 – 2.46

2020 – 2.93

2021 – 5.61

5 Year EPS CAGR: 46.1%

Google, a 1.54T market cap company, is still growing at 20%+ per year – that is insane.

I firmly believe Google to be a wonderful business, with a lot of growth ahead of it.

*This is not financial advice, always do your own research*

Crosspost from r/HoldForeverInvesting


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