Numbers analysis: Alphabet (GOOGL)

Alphabet is a holding company, with Google, the Internet media giant, as a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and smart homes products, which include Nest and Google Home, also contribute to other revenue. Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), faster Internet access to homes (Google Fiber), self-driving cars (Waymo), and more. Alphabet’s operating margin has been 25%-30%, with Google at 30% and other bets operating at a loss.

Description taken from www.nordnet.se

I decided to look into the FAANG (Facebook, Amazon, Apple, Netflix and Alphabet) companies of which Alphabet has the lowest P/E. There was recently an article in Aktiespararna (Stocksavers in english), a Swedish magazine I read monthly. Also Micheal Burry from the Big Short movie recently bought some GOOGL. The American stock markets seem very strong and there is no sign of it slowing down. The American presidential election is in November. I would think Mr. Trump would want the stocks to continue to go up before the election.

Famed ‘Big Short’ investor Michael Burry’s top 5 portfolio holdings include a massive bet on Alphabet (GOOGL, FB, BKNG, GME, GS)

Charts

10 year weekly chart
1 year daily chart showing Cup and Handle pattern

Statistics

The numbers analysis below is the first step in Rule 1 Investing by Phil Town. In his book Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! (no affiliate) he writes about his investing philosophy which centers around four key principles he refers to as the Four M’s: Meaning, Moat, Management and Margin of Safety.

The first requirement is an average annual growth rate of at least 10%, the past 10 years, in the ROIC (Return On Invested Capital), Sales, EPS (Earnings Per Share), Equity and Cash Flow. The average 5 year and 1 year growth rates should also be above 10%. High growth rates suggest a sustainable MOAT.

Next step is to analyse the the Four M’s: Meaning, Moat, Management and Margin of Safety.

The aim is to find a fantastic company, with a great track record, to invest in for at least 10 year. The expected average yearly return is at least 15%. This is used in the calculations. With an investment of 100 USD and a yearly return of 15%, 100 USD will have increased to 405 USD in 10 years time because of interest-on-interest or compound interest.

Year20102011201220132014
ROIC
Sales (MUSD)2932137905460395551966001
EPS (USD)13.1614.8816.1618.7920.57
Equity (MUSD)46241581457171587309103806
Operational cash flow (MUSD)85059737115531316013620
P/E22.6420.7221.9529.4825.23
Year20152016201720182019
ROIC26.6%28.5%17.8%29.4%24.2%
Sales (MUSD)7498990272110855136819161857
EPS (USD)22.8427.851843.749.16
Equity (MUSD)120331139036152502177628201442
Operational cash flow (MUSD)1634819478126623073634343
P/E33.9428.4758.6523.9127.23

ROIC rates gurufocus.com. The rest are from macrotrends.com

Growth Rates

Yearly average10 year5 year1 year
ROIC25%24%
Sales Growth Rate21%21%18%
EPS Growth Rate16%21%12%
Equity Growth Rate18%14%13%
Cash Flow Growth Rate17%20%12%
Growth rates x 2Average P/EMedian P/EAverage between the high and low P/E
P/E36.0029.2226.2331.11
Calculated future price in 10 years9263751967498005
Calculated Price2316188016872001
Margin of Safety (50%)11589408441001

Current price: 1594 USD

To be considered for further analysis here, as a growth stock, the requirement is that the 10 year yearly average growth rate is at least 5% in all five categories. They are. I will have to look more into other aspects at a later date. The growth numbers are great and the price is below calculated fair values. However they are higher than the calculated Margin of Safety.

Fair value range is 1687 – 2316 USD
Margin of Safety 844 – 1158 USD

It would seem that a great buying oppurtunity was during the COVID 19 dip. Considering the strength of the current market, I initiated a small position (1% of total portfolio value) in GOOGL through a Minifuture with a 2,5x leverage. I would have bought 1 stock share but the position would have been too large at the moment. I’ll research more before deciding if I should keep, increase or sell my position.

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