alphabet has been a monster long-term winner for its investors up more than
4,500% since his company's IPO however this highly profitable Cash Cow business
is currently down 22% from its 52-week high we think that right now is a great time for
investors to start building out a position in this stock here's everything you need to know
about investing in alphabet today my name is Brian Feroldi and my name is Brian Stoffel
thanks to commonstock for supporting today's video as of the time of this recording I'm a
shareholder of alphabet as am I and it's worth pointing out Brian that alphabet is better known
by its largest subsidiary which is Google now this is a $1.5 trillion dollar company that has
two different tickers you can choose from they have different voting rights but for our purposes
there's no big difference alphabet's mission is to organize the world's information and make it
universally accessible and useful this is one of the best mission statements I've ever seen and
alphabet really helped to put mission statements on the map so how does it do that well right now
Google has nine different tools that are used by at least a billion people to help organize their
information every day it's also worth pointing out that the Google cloud has started generating
meaningful Revenue as well while alphabet has done a decent job at diversifying its Revenue
over time the company is still primarily making its money off of advertising Revenue coming in
at more than $209 billion in 2021. it's important to remember that for all Alph bet and Google do
this is still primarily an advertising company with a few Services added in like Google cloud
and YouTube premium TV Google has reached the phase of its life where its customer acquisition
costs are extremely low that's large we do it at Google's massive influence on society around the
globe consumer demand for advertising is slightly cyclical although in past recessions Google has
been able to grow because it continues to capture market share and the nature of advertising is a
recurring Revenue business model so the vast majority of Google's revenue is recurring in
nature turning to the moat we're first going to tackle the network effect now not only does the
company's algorithm benefit when more people use the search terms but certain parts of the business
benefit as well like YouTube the more content creators the more viewers the more viewers the
more content creators in addition to the network effect Google definitely benefits from strong
switching costs once a user gets set up using search mail YouTube or drive it becomes arduous
to switch over to a competing product this is especially true for the company's Advertiser
once they get set up inside Google's Walled Garden it's hard for him to switch away but
I would argue that the largest mode that Google has is low cost production what is being produced
data and that data is then used for advertisers how is the low-cost production happen because
the company has those nine tools that have over a billion users collecting data every
day moreover you could also argue that Google has an unfair distribution Advantage about 90%
of the smartphones that are sold worldwide come pre-installed with Google's products and many
of the browsers that are out there have Google pre-installed as a default that makes it hard for
many users to switch away to competing products especially when they're using those products for
free it's also worth giving Google credit for its brand value this is a company whose name
has become a verb and is used around the world now putting all those pieces together we would argue
that while the moat is not widening as fast as it was in the past it is still widening today turning
to financials Google's numbers are about as good as they get Revenue growth has been high even in
recent years which is saying something given this company scale gross margin is decent coming in at
almost 57% and the company converts a lot of its Revenue into net income coming in at $75 billion
dollars in the patrolling 12 months and it's much the same story when we look at free cash flow the
company has one of the best balance sheets we've ever seen in Returns on Capital are high as for
management both Larry Page and Sergey Brin are no longer involved in the data decisions however they
are both members of the company's board the CEO position has been owned by Sundar pachai a Google
Insider who has been at the company for more than 18 years company does very well in Glassdoor
ratings and insiders own over 10 percent of this company that's good for about 175 billion dollars
turning to potential Google has a tremendous amount of optionality in it the company has been
pouring billions of dollars into its other bet categories for years and has dozens of potential
products out there that could turn into tomorrow's Blockbuster products now when we look ahead one of
the drawbacks of such a strong company is that there's not a ton of room for operating leverage
moving forward and the total addressable market for digital advertising and Cloud spending is
quickly approaching a trillion dollars but Google has already captured over a third of it that being
said most of the growth is organic however the company has made Acquisitions in the past like
YouTube how has Google done for investors the answer there is fantastic this company is up
more than forty five hundred percent since its IPL and it's also outperformed the market over
the past five years moreover it has a habit of exceeding wall Street's estimates having done
so three of the last four times on the bottom line the company is also returning cash to shareholders
in the form of BuyBacks it doesn't really have any debt to pay down at all and there's not a dividend
yet though I wouldn't be surprised if there is one in the future turning to risks the first
we need to keep in mind is competition Google is squaring off against many of the most profitable
and largest tech companies on Earth such as meta platforms Microsoft Amazon apple and more to say
nothing of the many upstarts that are trying to eat into Google's market share while the
company's moat has protected it so far it would be a mistake to overlook competition completely
beyond that it's also worth pointing out that this company has become so powerful that it has
landed in the crosshairs of regulators both in the United States and abroad and that is at risk worth
watching finally while Google's valuation today is more attractive than it has been in years it's not
classically cheap and can't be called that we'll have more to say on valuation in just a little
bit before we cover the company's earnings it's important to know that Google recently enacted a
20 for one stock split that went into place on July 15 2022. the numbers we're about to share
have all been adjusted accordingly to comply with that stock split so let's look at those numbers on
the top line alphabet grew Revenue by 23 percent which is astounding giving its size to 68 billion
dollars which came in ahead of wall Street's expectations on the bottom line Google reported
Gap earnings per share of a dollar 23 that was below wall Street's estimates however there's an
important caveat when looking at Google's earnings that we need to cover and here's what that caveat
is when we look at the first quarter of this year compared to the first quarter of last year we see
a huge swing in other income this is from the equity Investments that Google has made in other
companies the accounting change requires Google to mark up its net income when those Investments
go up in value and mark down its net income when those Investments go down in value for that reason
the company's net income isn't the best indicator of profitability at The Core Business finishing
up the first quarter margins came in in line with what the company historically does and free cash
flow which we think is a better indicator of profitability the net income was up 15 percent
management doesn't give guidance for the quarter or year but for what it's worth Wall Street is
currently expecting 14 Revenue growth in the most recent quarter and a slight decline in earnings
per share and it's the same story when we look at the full year Wall Street is expecting Revenue
to grow 15 percent to nearly 300 billion while earnings are supposed to decline slightly so what
should investors watch to tell if their thesis is on track first keep an eye on gross margin we want
this figure to remain high and hopefully expand over time as the company's products continue to
scale and become more mature second keep an eye on Google Cloud this is one of the new business
segments outside of advertising that's been growing very fast third keep an eye on that
other bets category we've been patiently waiting for more than a decade for some of the company's
other bets to pay off we could be on the cusp of seeing that with the company's waymo division
but we want to see those events eventually turn into revenue for the company and finally keep
an eye on free cash flow for the reasons that we've already talked about net income is not
the best proxy for how profitable the company is we're going to be watching free cash flow when
we take it all together we believe that Google's moat is stable at worst and widening at best and
overall we believe that the thesis for owning this company is fully on track I had a Google recently
scoring our investing checklist the answer there is excellent this company got an 83 on
my investing framework but puts it well into the high quality business category and it got a 13 and
a half on my framework giving it an anti-fragile rating one of the highest scores I've gotten now
when thinking about valuation it's important to keep in mind that Google is in the maturity stage
for that reason price to earnings ratio and price a free cash flow are two metrics that are likely
best for determining the company's value although as we've said numerous times now the earnings of
this company are artificially depressed so you have to keep that in mind when judging that metric
turning to the company's price to sales ratio of six that's high on an absolute basis but roughly
in line with where Google has been in its past if you look at gross profit this figure has been
climbing steadily since this company came public but really accelerated in 2020 into today when
judging this company on a price to gross profit basis Google is currently coming in at about a
10 that's a fair number in absolute terms but let's turn to my favorite metric for measuring a
company like Google and that would be the price to free cash flow ratio at trading at about 23 times
trailing free cash flow again that's not cheap but it is historically low for the company the
price to earnings ratio has some flaws but on that basis the company is currently trading for
about 21 times trailing earnings which is low on historic basis and about 21 times foreign earnings
which is relatively high so there you have it we're going to be buying shares of alphabet for
our own portfolio that we have over account common stock what do you think of this head on over and
leave a comment I want to give a shout out to disrupter investing who left the top comment
on our profile from Airbnb common stock sent disrupting investing a cash payment for making
such an insightful comment and common stock will continue giving away money a hundred dollars to
the most insightful comment on our buy decisions so head on over to common stock and the link
in the description make a comment and you could potentially win that hundred dollars Brian's out