Stock Pitch | Alphabet (GOOG)

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Introductie

Alphabet Inc. is sinds 2015 het moederbedrijf van Google LLC (het bedrijf achter de populairste zoekmachine Google) en enkele andere technologiebedrijven. Maar hoe verhoud de koers eigenlijk t.o.v. hoe zo’n tech-gigant er nu voor staat? Lees dit artikel als je te weten wil komen of het mogelijk ook een interessante belegging kan zijn.

Deze stockpitch bevat: bedrijfsomschrijving, investment thesis, key risks, waarom bestaat deze kans, catalysts en waardering.

Business Description

Summary

Alphabet (often referred to as Google) is a collection of several high quality businesses arguably synonymous with the internet itself. Alphabet can be split up by the following 4 segments:

1. Google Services
   • Search
   • Google Network
   • Youtube Ads
2. Google Cloud
3. Google ‘Other’
   • Youtube Subs
   • Play, Hardware & Other
4. Other Bets

1. Google services

Search: Google Search is not only the worlds most used Search engine, it’s also the most profitable. It has become synonymous with the word ‘search engine itself’. (e.g. let me google that for you vs let me look that up for you). Google’s search engine is their most developed revenue stream with over $148B in revenue run through advertising.

Google Network: Consists of Adsense, Ad Manager and Admob, which is a pay per use (ads) platform. This allows users to run ads automatically and target their audience. Google Network does roughly $32B in revenue.

Youtube Ads: Youtube is the #2 most visited website in the world (only trailing Google Search). Everyone knows and loves youtube. Through running ads on this platform, Alphabet has managed to monetise this video platform (it also runs subscriptions). Youtube as a platform did roughly $28,9B in revenue in FY’21. 

2. Google cloud

Google Cloud: Through Google Cloud Platform, Google offers a suite that runs on the same infrastructure that Google uses for their own services. Google Cloud is the #3 player in the Cloud space, trailing only AWS and Azure. Important to note is that Google had a late start and is now growing the fastest of the sector. Google Continues to keep winning large customers. Through Google suite, Alphabet is the only legitimate competitor with Microsoft Office.

3. Google other

Google Play: Google Play serves as the app store for the Android operating system. Besides apps, it also offers other services such as books, games, …

Hardware: Alphabet also sells hardware products such as their Pixel phones, Fitbit wearable devices, Google Nest. The Pixel phones are sold at breakeven as alphabet is trying to lock in their market share. There is arguably tremendous runway in this segment as they become increasingly independent to run their ad services.

Youtube non-ads: Youtube also gets monetised through Youtube Premium and Youtube TV subscriptions

4. Other Bets

Waymo: Waymo is a self-driving technology that has driven over 20 billion simulated and real world miles (combined). Through this technology Alphabet could solve one of the worlds leading causes of death and monetise human transport completely passively. They’re also involved with Autonomous Trucking which is easily monetisable. Waymo uses the Google Maps technology.

DeepMind: AlphaFold similarly to Schrodinger, develops 3D protein structures through AI. This predictive technology could accelerate research in every field of Biology.

Google Nest: Home products such as security cameras, doorbell, audio etc..

Google Fiber: Google Fiber is a high speed internet service that utilises fiber optic cables.

GV/GC: Google Ventures and Google Capital are venture capital/Equity investment strategies. Through these segments, Google has acquired stakes in Lyft, Uber, Airbnb, Flatiron Health and so on.

Investment Thesis

Overview

1. Alphabet as a conglomorate compresses the valuation of their smaller segments. If Alphabet would split into multiple segments (e.g. regulation), shareholder value would be unlocked instantly. Google Services in itself could easily cover the current market cap on its own.
2. Through their pixel phones they become increasingly more autonomous as they’re less reliant on Apple. Through this hardware their Trafic-Acquisition-Cost (TAC) to run their ads would become near zero. Android to date is (besides Google Play) largely unmonetised.
3. Youtube on its own could easily be worth the entire enterprise value of Alphabet in the future. Youtube still has a high runway of growth and has very low CAC, does not have to pay much for content and has far fewer competitors as the Industry Standards and Network effects have already been formed.
4. Through Alphabets ‘Other Bets’ you basically subscribe to a free call option. If only one of the bets works out (e.g. Waymo or AlphaFold), substantial amounts of shareholder value would be unlocked.
5. Google Cloud is rapidly winning large customers, as they reach scale they should be able to operate at stronger margins. I don’t believe they will catch up with AWS, however as they mature and start to squeeze out profits, a strong value unlock should follow.

#1 Google services

• Google Services has been conested many times by competitors (Bing, Duck Duck Go, Yahoo, Yandex, …). Yet none have rivaled the UX of Google.
• Strong Moat as Google has synonymous with search. The moat itself is reinforcing as Google through its AI and data collection becomes better at offering more personalised ads, enhancing the UX over time.
  Incredible track record of profitability and growth. As Google’s personalised ads remain the advertising norm to push consumerism, Google Services should enjoy strong growth for years to come.
• Google Services has EBITDA margins of 60%+ growing FCF/Share for 20% CAGR the last decade.

#2 Pixel Phones

• Android itself remains unmonetized as Google does not charge for installs. At current market share of 1.5B~ android phones sold each year. If they only charge $5 per phone they tap into a high margin, high quality revenue stream.
• If their Pixel phones are successful, they lock-in future ad revenue as they become less dependent on Apple. Saving them billions in service contracts.
• Google can sell their phones at breakeven just to funnel more users into their ecosystem. Google could in fact rival Apple’s value proposition at a lower price, as they are not dependent on high margin phones to push cashflow.

#3 Youtube

• It is still early days in YouTube monetisation. Not only can they share high quality video ads, Youtube also has tons of optionality through YouTube Premium. YouTube is arguably one of the most flexible platforms in the world with content for literally everyone.
• Youtube enjoys Scale Economies Shared, as they handsomely reward their content creators through monetisation. This empowers them to make better content allowing Youtube to run more ads. Youtube compared to Netflix has very small content creation costs. The bigger Youtube gets, the larger their content library, the better the user experience gets.
• Youtube is increasing both its user base and ARPU at the same time pushing strong double digit growth for the near future.

#4 Other Bets

• Deepmind through AlphaFold could revolutionize how we view biology research. As this research taps into huge markets (e.g. oncology and other medical treatments).
• DeepMind is the #1 desired company to work for in promising young engineers. As technology companies rise and fall due to their talent acquisition. DeepMind seems to be winning the war on talent (conclusion through anecdotal evidence)
• Waymo taps into a huge market as they rival Tesla for the race to autonomous driving. 
• Even if all the other bets are moonshots, if only one sticks, this segment could easily be worth multiples of what it’s worth today. Don’t forget Youtube and Android both fell under the ‘moonshots’ category of Alphabet as well.

#5 Google Cloud

• Google continues to win customers taking market share in core sectors like telecom, media, etc… Growing >40% YoY.
• As Google Cloud Platform (GCP) Matures, they should easily push profitability. GCP currently runs at a negative runrate of over $3B. However when Alphabet decides to become profitable, this should bring a ‘springed coil’ type of dynamic to GCP’s bottom line. I believe they can easily have mature net margins of 25%+. 
• The Global Cloud market is believed to grow at a 15%+ CAGR up to 2026. Assuming GCP continues to thrive, GCP could easily be a $400B segment.
• Through the recent acquisition of Mandiant, GCP strengthens their value proposition through military type security.

Investment thesis quantified

Key risks

• Alphabet being such a large company puts a bull’s eye on its back for regulation and fines.
• Short Video platform pose a threat to Youtubes Dominance.
• Traffic-Acquisition-Costs skyrocket due to negotiations with Apple going south.
• Advertising budgets are tied to economic prosperity.

Mitigations

• I’d argue that a break-up of Alphabet would in fact unlock shareholder value. Fines due to GDPR (EU) and other do pose a real threat. Yet Alphabet’s war chest should easily cover this.
• Resurgence of TikTok and Shorts on Instagram and Facebook could pose a threat to Youtube’s dominance in the Video On Demand space. I believe this not to be true as the consumed content is of a different nature. Short videos are also less monetisable.

• Alphabet is actively trying to pull their users to their android phones. This should cover the IOS risk. Alphabet could still cover these contracts with their war chest.

• With a recessionary environment lurking, this could impact Alphabet’s core revenue streams. Previous recessions (e.g. Covid, 2007-2009), Alphabet managed to remain stable or even grow YoY.

Catalyst

• In july 2022 Alphabet will do a 20 – 1 stock split. If it follows its predecessors (Tesla and Apple) inflows could follow. Also after the stock split the stock qualifies to join the DJI. 

• A Breakout of one of the segments could immediately unlock shareholder value.

• One of the ‘Other Bets’ pays off. Most probably Waymo or DeepMind could immediately attract a new growth opportunity making investors rally behind a new promising business segment.
• Alphabet proves once again that it is in fact not decellerating

Why does this opportunity exist?

• Alphabet is a huge company. Many investors believe that they will stop growing due to their size. As they keep coming up with new revenue streams they keep their optionality strong, therefore, I believe most investors to be wrong.
• Recessionary environment due to high inflation and high energy prices have pushed the broader market downwards dragging Alphabet with it. 
• Fears of lower advertising budgets make investors believe that Alphabet will stop growing. 

• Regulationary fears due to monopolistic nature of their business. As previously discussed, this would actually be bullish.
• Investors believe that Alphabet has been overearning due to the pandemic as internet traffic expanded due lockdowns.

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