Value Investor Daily #39

In partnership with

We put your money to work

Betterment’s financial experts and automated investing technology are working behind the scenes to make your money hustle while you do whatever you want.

Learn more

Alphabet (GOOGL) faces regulatory and monopoly concerns; the stock is down almost 20%. It has lagged behind the market YTD and has fallen near its peak 2021 price.

The stock looks attractive here vs. the Magnificent 7, trading for 21x GAAP earnings, the lowest of the cohort. The S&P 500’s P/E ratio is 23x, and the Nasdaq 100’s is 30x.

Antitrust Concerns

Let’s look at the antitrust cases.

Google just lost a $2.7 billion case against the EU for favoring its shopping comparison engine over European competitors.

The company is awaiting an appeal against another $6.65 billion in fines for similar anticompetitive practices in its Android mobile operating system and AdSense advertising businesses.

The US DoJ recently won a case ruling that Google has a monopoly in the Search business. Courts are considering breaking them up. However, a breakup decision may never come, with courts opting for other remedies, such as forced data sharing or simple fines.

They’re currently on trial for a second similar US case regarding their digital ad sales business.

Alphabet has built and amassed a fantastic collection of businesses with over 200 acquisitions.

These include Google Search, Android, Google Cloud, AdSense, YouTube, Waymo, Waze, Fitbit, Nest, Google Fiber, and many more.

If it were broken up, the sum of the parts could be more than the current value. Many of the properties are still in rapid growth mode.

YouTube alone has 2.7 billion users and over $30 billion of revenue, growing at double digit pace, 13% YoY.

Google Cloud is similar, with an over $40 billion run rate and growth at over twice the pace, 28% YoY.

So, while the antitrust cases are expensive and distracting, they don’t seem like they’re going to stop or even slow down Google’s business.

But the market hates uncertainty, so investors will need to be patient. The multiple will likely stay depressed until we clearly understand what penalties Google will be subject to.

AI Landscape

The other major concern is whether Google can compete in AI. The answer seems to be “yes.”

It’s unclear if companies will ever profit from AI chatbots, but Google has already quietly eclipsed ChatGPT. Google’s Gemini has an estimated 330 million monthly users vs. ChatGPT’s 200 million.

Co-founder Sergey Brin is back at the company working “pretty much every day” on AI.

Google will likely continue to invest whatever it has to to stay competitive in AI.

Valuation

Let’s look at valuation.

• TTM Revenue: $328B

• Gross Profit Margin: 57.64%

• EBITDA Margin: 35.18%

• Operating Margin: 31.03%

• Net Profit Margin: 26.7%

• P/E Ratio: 21.69

• P/B Ratio: 6.34

• EV/EBITDA: 15.91

• Revenue 3Y CAGR: 14.23%

• EPS 3Y CAGR: 14.77%

• Return on Total Capital (TTM): 20.34%

• Debt to Equity: 9.55%

Recent Performance

• Q2 2024 Revenue: $85 billion (up 14% YoY)

• Google Services Revenue Growth: 12% YoY

• Google Cloud Revenue Growth: 29% YoY

• Operating Margin Expansion: 26.44% in 2022 to 31.03% TTM, due to cost reengineering

Analyst Estimates

Analysts expect 17.43% EPS growth vs. a 10-year average of 21.98%.

Discounted Cash Flow (DCF) Analysis

Our fair value estimate came to $224, a 30% margin of safety compared to today’s roughly $155 price and a 44% potential upside if it reaches the estimate.

If EPS grows at 17.43% for the next ten years, it will go from $6.97 per share to $34.75.

Using the current 10-year yield of 3.68%, we can calculate a rough future multiple of 27.17x. That means a theoretical stock price of $944 by 2034, which comes to a 19.8% CAGR.

The company has a $70 billion share buyback program in place.

Conclusion

Google faces significant regulatory challenges and competitive risks but has substantial AI and cloud computing growth opportunities.

Valuation is depressed due to the current uncertainties, which may present an opportunity for patient value investors.

As always, do your own research and decide for yourself.

Thank you for reading!

We put your money to work

Betterment’s financial experts and automated investing technology are working behind the scenes to make your money hustle while you do whatever you want.

Learn more