Alphabet (or Google) is probably one of my favorite stocks.
I first bought shares back in 2009 and haven’t fallen out of love since.
Now I have to be careful when I say that.
The way to “love” a stock - it’s totally fine by the way; there’s nothing weird about
it - and they don’t teach you this in schools - but the proper way to love a stock is to
ALWAYS put it on trial.
It’s not like a human relationship where we should be forgiving of one another.
No.
I have high demands of the stocks I allow in my investment portfolio - and if they even
LOOK like they’re about to disappoint me … especially when I’ve already been eyeing
an even more attractive …opportunity, I won’t hesitate to kick that tired old stock
to the curb.
It served its purpose.
I can move on.
And hey, maybe that sounds shallow, but that’s what it takes to survive in this business.
I love my Google stock - we’ve had some great times over the years - but I’m not
married to her.
So, let’s do an evaluation - a deep dive - let’s see how she stacks up.
Let’s go…
– Welcome back you beautiful 17,000 subscribers.
Now you… well, I’ll never kick you to the curb.
I’m glad you’re here - I really appreciate the support and am enjoying getting to know
you all.
Now I am a practicing professional, so I legally have to say that this is not investment advice.
And if you pay attention to what I’m saying, I’m not telling you to go out and buy shares
in Google, I do not know your financial situation, so it’s impossible for me to know if that
would make sense.
But I do want to help you know how to evaluate it - and other stocks - for yourself.
There’s a link in the description to my full disclaimer and disclosures.
Alright, let’s go!
Now if we want to do this stock analysis right - which (of course, here on this channel)
we do - there’s a lot to unpack to really understand a company like Alphabet.
So rather than make a single several hour video for our deep dive here, I think it’ll
be significantly more helpful to break our analysis up a bit.
So, in this video, I just want to touch on a couple of the most significant factors that
I believe set Google apart.
One of the reasons why Alphabet is especially intriguing right now is because of how the
market is treating it relative to other high tech growth stocks.
Now, both the Nasdaq - as represented here by the QQQ Invesco ETF - and Google were hitting
all time highs about six months ago - in late November of last year.
As of this recording they are both down about 25% from those highs.
Now, I talked before (in my video about profiting from inflation) about how growth stocks are
some of the worst to own during a rising rate environment.
And that’s because many of them are supported - are funded - by debt.
Their revenue and profits by themselves are not enough to fund their operations.
So as interest rates go up, the debt they require to keep going becomes more and more
expensive - increasing their losses more and more over the short term and ultimately shrinking
their runway to profitability - you know, before they go bankrupt or just get bought
out for cheap by some larger company.
So it makes sense to see the Nasdaq reeling in this environment.
Many of its component companies will be affected in this way by a policy of rising rates (now,
as to whether or not the Fed actually sticks to that policy like they should… well, that's
a question for another (sure to be less popular) video ;-). But if the Fed does keep raising
rates, many Nasdaq companies will be severely impaired in this way … But not Alphabet.
The company has an enviably healthy balance sheet.
They don’t need debt to support their operations.
They currently have just under $13B of long-term debt on their books.
But coupled with their $130B+ of cash and short term investments and their more than
$50B in trailing 12 month free cash flow (not to mention, considering that FCF figure was
after buying more than $50B of shares last year)... yeah, they’re good.
If it’s not financially prudent to borrow, they don’t have to.
Not all that many companies (relatively) in the Nasdaq have that luxury.
So it makes sense (on that basis at least) that Google should not fall by as much as
the Nasdaq on the whole in this macroeconomic environment.
Now of course, Alphabet, like any company, does have its own headwinds to consider (not
the least of which are the regulatory concerns and pressures with which they will inevitably
and constantly be faced) - we will absolutely fully vet those concerns in coming videos,
so I’ll hope you’ll stick around.
But I do want to leave you in this video - as you start to think seriously about how to
evaluate a stock like Alphabet - I want to leave you with one of my favorite things about
this company - and it actually goes back to the whole reason they changed their name from
Google to Alphabet - it’s the way the company is structured.
In many ways, they really operate like a cut-throat venture capital firm - one that doesn’t
have to waste time seeking additional capital (from new accredited investors) because its
core business is cranking out more than 10 billion dollars in free cash flow quarter
after quarter - a VC firm that has access to (...actually employs) some of the smartest
minds in tech, coding, AI, engineering…
everything you could want for the businesses they’re trying to build.
Think about the way the company is set up.
You have (1) Google Services - which is their cash cow with a wide, wide moat.
And then you have (2) Google Cloud and (3) their Other Bets (you know, as opposed to
their alpha-bet…) - and both of those areas on the whole are currently loss making.
I feel like the way Alphabet generally gets valued is by only looking at the profitability
of Google Services and viewing those other two categories as just the ‘cost of doing
business’ - almost as necessary expenses to keep Google Services growing as fast as
it has been.
But in reality, if you stripped those last two categories out, if all they did was focus
on number 1, their numbers, at least for now, would look even better.
But no, instead, you have this VC structure, run by a team that has a proven track record
of innovation and building sustainable, cutting-edge tech businesses.
My thesis is that Wall Street isn’t really properly accounting for the long term prospects
of these other businesses growing within the Alphabet ecosystem.
Compared to other similarly sized, large tech stocks - the market seems to be valuing Alphabet
like a solid but mature company - one that doesn’t really have THAT much more growth
ahead of it.
And if it were just Google Services, I might agree with this valuation.
But as it stands right now, I feel like I’m getting a free pass - a free call option if
you will - to these high tech opportunities: venture capital investments that I would NOT
want to back if it weren’t for the consistent cash flow and proven team behind them.
I plan to dive into each one of these opportunities - so that I can better understand them for
myself and my clients - but also to help you to think through, not only this company but
also others, as you try to build out a portfolio in which you’re confident going forward.
But here are some quick observations about the investment opportunities I suspect investors
in Alphabet stock can profit from without the risk of the whole thing going bust…
First of all, their biggest, is their investment into Cloud.
This is a massive market that's growing like crazy every year, and Google’s presence
in it and revenue from it have been growing by 40 to 50% when comparing year over year
comps over the last couple of years.
Then, we have the “other bets.”
This’ll be fun to break down and dive into even if it is much harder to get all the information
we might want.
Let me just point to a couple to get your wheels turning and hopefully get you excited
about this process.
I hope you’ll let me know your thoughts about all this in the comments!
The first of these other bets that I’m excited to see play out is Waymo - the self driving
taxi.
What could ultimately be a real threat to Uber and Lyft.
You see, this is a prime example of what Alphabet is able to do because of the way it’s structured.
Uber was stretched too thin, trying to win this race - and since they were struggling
with profitability anyway…
they shut down their efforts in December of 2020.
They made a similar move in the summer of 2018 with their trucking division (while Waymo
is still trucking along…).
Alphabet winning this race could be a meaningful catalyst for long term growth and a significant
disruptor for a lot of other businesses.
And then there’s DeepMind - you know, the company Google bought that’s focuses on
developing safe AI systems?
Its most recent and revolutionary breakthrough has been protein folding.
A game changer for the scientific community.
It’s been operating at a loss for a long time and its biggest client is, well, its
parent, Alphabet.
You see, it helps optimize many of its sister companies - meaning lower costs; improved
margins.
The benefits and long term implications there can understandably be difficult to quantify.
But in its most recent financial statements, DeepMind itself just started generating a
profit - it’s small, sure, but when you look at everything that company is doing - from
a business (an investor) perspective - at all the possibilities for future (some potentially
large) streams of income - it’s not hard to feel as though you’re getting a free
call option (that doesn’t expire) on a massive high-tech, cutting edge growth play!
Those are the types of companies - the Waymo’s; the DeepMind’s - that if they were stand
alone - historically loss making; probably riddled with debt - that I might lust after
owning but would be hard pressed to actually take a position in - the risks are just too
great, even though I can see the massive potential.
But I don’t have to make that compromise here.
With Alphabet, Cloud and many of these other bets are just cherries on top of an already
tasty investment.
At least, that’s the way it looks to me on the surface.
We’ll start diving deep into each of these pieces of the Alphabet pie to see what we
come up with.
I look forward to seeing you around as we do!
Take care.