Author Topic: GOOGL - Google  (Read 430185 times)

chrispy

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Re: GOOGL - Google
« Reply #1860 on: March 02, 2018, 04:03:37 AM »
During his Google talk when he presented the 2014 numbers he ended with something like, "looks like there is a good chance to double over 5 years and I should look more at this stock."

I think this is something we all are susceptible to... We love a company and understand all of these ingredients points but the stock used to cost less and currently isn't "cheap". As Fisher pointed out, there is a reason why great companies are not "cheap".


chesko182

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Liberty

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Re: GOOGL - Google
« Reply #1862 on: March 05, 2018, 07:56:55 AM »
thoughts?

http://www.gannononinvesting.com/blog/2018/3/4/omnicom-google-and-facebook-why-all-growth-stocks-end-up-in-the-same-place

I've skimmed it. I think he may be underestimating how digital advertising is growing the overall advertising pie, in both depth and breadth.

Small advertisers that could never have bought TV or print ads can spend small amounts on targeted ads and measure they returns. Poorer countries that weren't typically targeted by the old ad agencies or had underdeveloped media with poor inventories can now also get in the advertising game with all the dynamically-priced online inventory.
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KCLarkin

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Re: GOOGL - Google
« Reply #1863 on: March 05, 2018, 08:49:49 AM »
thoughts?

http://www.gannononinvesting.com/blog/2018/3/4/omnicom-google-and-facebook-why-all-growth-stocks-end-up-in-the-same-place

I enjoy his writing style. But his conversational style and napkin math does gloss over a few things with Google.

His starting point is free cash flow. This tilts things in favour of value stocks. Google is spending double the depreciation charge on CapEx. So probably half of the CapEx charge is for growth. Working capital also tends to hurt FCF for growing companies. This isn't a big problem for Google but it does add lumpiness to FCF. Finally, free cash flow doesn't expense stock compensation. This is a huge problem with tech companies. For those reasons, I prefer to start with earnings. If free cash flow is consistently lower or higher than earnings, I like to know why. But it is not my preferred valuation metric.

Starting with earnings, there are a few things skewing 2017 results. The changes in the tax code resulted in very high taxes for 2017. Google paid a very large fine in Europe. Google is also losing $3.4 B on "other bets". These are growth investments. In 5 or 10 years, these products are either going to be producing growth, profits, or they will be shut down. Gannon's premise is based on the TAM for advertising being a fixed market. To fit with this premise, I will give Other Bets $0 value and assume they will be shut down or profit neutral in five years. So I add back $3.4B to operating income. Based on these adjustments, GOOG is trading at more like 29x owner earnings.

Gannon also assumes that 15x is a fair multiple for a low growth company. However, one could easily justify 20x or even 25x as the terminal multiple. So I think he overstates the multiple compression. But he is right that underestimating multiple compression is the reason why growth investing tends to underperform. Let's assume 2-4% per year in multiple compression.

A much bigger concern is that he ignores both Alphabet's cash and the cash generated over the next 10 years. Assuming 10% earnings growth for the next 10 years, that could be well over $500B! The owner earnings yield is 3.4%. This is enough to offset the multiple compression. So let's call it a wash.

If 10% growth for the next decade is a reasonable growth estimate, then GOOG will return 10% per year. 10 year treasuries are 2.8%. According to most reasonable estimates, the S&P 500 is priced to return 6-8%. So Alphabet looks attractive on a relative basis. Even if GOOG only grows 5% per year, you will still do much better than a 10 year bond. So your downside risk is limited.

The biggest risk is poor capital allocation. If that $500B of cash is wasted or just sits on the balance sheet, you could get less than 5% returns.

But most of the uncertainty seems to be on the upside. The company could easily carry some moderate debt. So it's conceivable that the company could return 100% of the current market cap in dividends and buybacks over the next 10 years. Bets on cloud computing and self-driving cars could create the next wave of growth. Some of the venture capital investments could payoff. Above average growth might continue past 10 years, resulting in much lower multiple compression than anticipated. Margins could be improved as growth slows.

So the odds of beating the S&P 500 are very high. Will it meet Gannon's 15% hurdle rate? Probably not.




Broeb22

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Re: GOOGL - Google
« Reply #1864 on: March 05, 2018, 05:27:29 PM »
I'm also not sure I buy Gannon's market share numbers for Google/Facebook. He cites 40% market share of global ad spend. Using eMarketer's estimate of $584BN in global ad spend in 2017, GOOG/FB's combined ad revenue is still $135BN, or 23% of global ad market share (maybe this % would be higher ex-China). Still if 23% is closer to the right number than 40% is, as Geoff cites, then GOOG/FB could take 70% share and triple, which even Geoff admits isn't overly ambitious to assume.

Is Geoff citing U.S. market share or global market share? Its not clear to me.

KCLarkin

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Re: GOOGL - Google
« Reply #1865 on: March 06, 2018, 08:37:47 AM »
thoughts?

http://www.gannononinvesting.com/blog/2018/3/4/omnicom-google-and-facebook-why-all-growth-stocks-end-up-in-the-same-place

My other thought is that adding a few reasonably priced growth stock to a value portfolio adds some important diversification. Over this market cycle, we've seen many famed value investors taken out on a stretcher because traditional value stocks have underperformed for so long. Yet, many wonderful growth stocks have sold at very reasonable valuations at different points over the last few years.

Adding Google at a 10-12% expected return might drop the return potential of a deep value portfolio, but it should help smooth out the return profile.

I just wish I had come to this conclusion earlier, as I've missed many attractive opportunities well within my circle of confidence because I didn't think they would meet my 15% hurdle unless valuations remained high.
« Last Edit: March 06, 2018, 08:48:57 AM by KCLarkin »

philly value

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Re: GOOGL - Google
« Reply #1866 on: March 06, 2018, 09:34:52 AM »
I'm also not sure I buy Gannon's market share numbers for Google/Facebook. He cites 40% market share of global ad spend. Using eMarketer's estimate of $584BN in global ad spend in 2017, GOOG/FB's combined ad revenue is still $135BN, or 23% of global ad market share (maybe this % would be higher ex-China). Still if 23% is closer to the right number than 40% is, as Geoff cites, then GOOG/FB could take 70% share and triple, which even Geoff admits isn't overly ambitious to assume.

Is Geoff citing U.S. market share or global market share? Its not clear to me.

GOOG's market share of *digital* spend ex-China is low-40s%, I would imagine that is what is being discussed (if not, it's simply way off). Total digital ad spend ex-China as a % of total ad spend (digital + non digital) is also roughly 40%, meaning Google's market share of total ad spend ex-China is something like mid-teens %.

The past few years, GOOG + FB have basically captured ~100% of digital advertising growth, with GOOG holding market share constant in the ~40% range and FB gaining share.

villainx

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Re: GOOGL - Google
« Reply #1867 on: March 06, 2018, 11:06:29 AM »
My main thing with the Gannon write up is the pie growing. Or basically changing.  People use of technology is so dynamic.

thowed

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Re: GOOGL - Google
« Reply #1868 on: March 08, 2018, 08:53:20 AM »
I think Google is amazing, but this is the sort of thing that I worry may not be priced in.

https://www.bloomberg.com/news/articles/2018-03-08/josh-hawley-s-missouri-senate-bid-could-be-a-problem-for-google

Liberty

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Re: GOOGL - Google
« Reply #1869 on: March 13, 2018, 09:40:51 AM »
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