Alphabet
2019 Q3 Results
October, 30 2019
TICKER: GOOGL
ISIN: US02079K3059
SHARE PRICE: $1.260
MARKET CAP: $874B
INTRODUCTION
Have I already told you that I love Google? I think I did here and here.
Much to my surprise, I was much less enthusiastic by reading this Q3 Conference Call transcript than by reading Amazon’s Call transcript. Maybe because these guys aren’t as transparent as Amazon.
Amazon’s CFO talks about concrete actions they are taking. Building infrastructure for the one-day-delivery, hiring people to drive the new trucks,etc.
Sundar Pichai (Google’s CEO) talks about vague things. Just read his reply when an analyst asked him about Google Shopping:
“Obviously search is an important area, Image Search, Youtube, Maps are all great surfaces by which I think users come with varying degrees of commercial interest looking to discover and at times transact as well.”
Ok. I get what he is saying, but what about palpable actions that he is taking? I don’t doubt for a minute that he is taking them but I would like to know more about them. Maybe that’s because this is a software company and not a logistics/retail company. I just feel I didn’t get as much information by reading Alphabet’s call than by reading Amazon’s.
The share price is up 19% year-to-date.
In line with what has been happening for more than a decade.
INCOME STATEMENT
Revenue was up by 20% in Q3, a small decrease in growth when compared to last year.
And the operating margin was 23%, 3% lower than in 2018.
This decrease is due to the higher depreciation and amortization charges related to previous investments in new data centers as well as content acquisition costs related to the YouTube Premium.
Yup, that’s right. Youtube is coming after Netflix. One of the new series I’m eager to watch is one produced by Network Media Group (already profiled by me) and Robert Downey Junior about Artificial Intelligence, that should come out in Q2 2020.These new subscription businesses, Youtube Premium and TV, have higher customer-acquisition-costs.
This, in turn, has lead to a lower Net Income. As I said before, I wouldn’t give too much importance to the net income in the case of Google given the unrealised gains or losses on equity securities that influence the bottom line and have nothing to with the business.
REVENUE BY SEGMENT
Although the company is successfully venturing into other business areas (cloud, productivity tools) Alphabet is still an advertising company. It will still be a long time until this becomes a properly diversified company.
TRAFFIC ACQUISITION COSTS
It’s good to know that even with increased competition from Amazon, the Traffic Acquisition Costs have remained stable at 69% and 22%
FCF
And finally, the FCF was $23B, a growth of 35% compared to last year mostly due to higher cash from operations and in some way to a lower CAPEX figure.
This was just a quick look into the Q3 numbers just to see if my investment thesis was materially affected by any new development. It doesn’t seem so.
I’ll keep my assumptions conservative and say that Google Ads will grow 15% for the next 5 years (it has grown 20% this year), “Other Revenue” will grow 20% and other bets won’t grow at all.
I still see a CAGR of 15% while being very conservative on my assumptions.
I will look in detail into all of Alphabet’s business lines and do a hardcore valuation exercise when the new All in Stocks Subscription Service is up and running. You can know more about it by clicking the link below.
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