dimanche 4 février 2018

Alphabet: Cash on hand

You probably know the method:

Deduce the cash held by a company of it's market value and then, see what the PE looks like.

A couple of years ago, the PE ratio of Apple was very low when you applied this method.

Now, let's take a look at Alphabet (Google).

The forward PE of Alphabet is 23.

The market cap of Alphabet is 775 billion dollars.

Long term debt: 4 billion dollars (virtually no debt given the size of the company).

Cash on hand: About 100 billion dollars.

100 billion divided by 775 billion equals 13%. So, if we substract all the cash, the PE of Alphabet should be about 13% lower.

Thus, the forward PE of Alphabet is about 20, which is not high at all for such a dominant business (increases in revenue of about 20-25% year over year). Actually, the market is more expensive than that. For instance, to give you an idea of what the market looks like, you could currently buy Procter and Gamble, a company that achieves almost no growth for about 19 times forward earnings.

OK, the ROE of Alphabet is not that high (about 14), but everything else is great with that stock. It's almost a monopoly in the western civilization.

Just take a look at that quote from Sequoia Fund investor's day (may 2011). There are some great stocks on the market, but I don't see many of them about which we could be so confident.

"What we found is that the days of someone coming up with a clever algorithm  and competing against Google in search are essentially over. A lot of people may not understand that when you search the Internet, first, you have to crawl the Intenet, download the Internet, and parse the Internet. That takes a tremendous amount of investment and infrastructure. Google owns more servers than anyone else. It owns a tremendouns amount of fiber optic cable. It places its computer servers next to very cheap energy. Google has its systems built literally next to hydroelectric dams.  So you're talking about a business with a tremendous amount of investment required."

2 commentaires:

  1. Goog is set up loose 2% again today, 7% overall since Friday

  2. Here's the issue with google. I'm quoting from a recent Seeking Alpha analysis regarding last quarter earnings:

    The issue was massive 34% growth in traffic acquisition costs (TAC) that CFO Ruth Porat blamed partly on mobile traffic growth. Costs for distribution partners was up an incredible 57% to nearly $2.8 billion while total TAC surged $1.6 billion to $6.45 billion. Costs were even up $950 million sequentially from the Q3 level of $5.5 billion.//

    Meanwhile, Facebook can grow their earnings exponentially with even less time spent on Facebook and less ads (the price of the advertising just goes way up).
    There's a new player in internet advertising that has started to make billions of dollars: Amazon.

    In fairness, the traffic acquisition costs of Google will not continue to grow at this very high rate. Google is a great growth and value stock right now.