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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