In Part 1 of my review of my November investment decisions, I focussed on decisions I made iwht my existing holdings. In Part 2 and Part 3, I review the new stocks I added to my portfolio and how I rationalized and came to my conclusion. As always I leverage the 8 Questions framework that I teach in my Everyday Investing online courses.
Opened position in Alphabet (Ticker: GOOGL)
Question 1: What do they sell?
(Per Reuters): Alphabet is a holding company. The Company holds interests in Google Inc. (Google). The Company's segments include Google and Other Bets. Google segment includes Internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome, Google Play, and hardware products, including Chromecast, Chromebooks and Nexus, which are sold by the Company. Its technical infrastructure and Virtual Reality are also included in Google segment. Google segment is engaged in advertising, sales of digital content, applications and cloud services, as well as sale of Google branded hardware. The Other Bets segment consists of various operating segments and includes businesses, such as Access/Google Fiber, Calico, Nest, Verily, GV, Google Capital, X and other initiatives. Other Bets segment is engaged in the sale of Nest hardware products, Internet and television services through Google Fiber, and licensing and research and development (R&D) services through Verily.
When we talk about Alphabet, we’re really talking about Google as it is the one driving revenues and throwing ridiculous amounts of cash and profits.
The Golden Goose for Google is still its search business. Google’s lifeblood is information, more specifically everyone else’s information. It’s the Encyclopedia Britannica on steroids (Do they still exist) as they scour the internet, archiving websites and blogs and video, and organizing it in a way that is ridiculously fast, and easy. They make money by selling ads and more significantly rankings in their search engine. Want your company to appear first on a search? Pay Google and they’ll make your company first of mind. It’s incredibly proficient at this.
That being said, the company has branched into other platforms where it attempts to add value to information. Traditionally most of it has been in an online and software (YouTube, Maps, Chrome Browser, Android) . The company over the past few years has been slowly building a hardware component. It is getting into the smartphone business with its first in-house iteration, the Pixel. Finally it bought out the Nest company which makes those fancy thermostats and webcams is it tries to embed itself in the Internet of Things world. Taking it to another level, it has also just released its own version of Amazon’s Alexa, Google Home. These two hardware moves caught my eye.
When Google developed Android it was primarily as open source operating system that would allow it to get into more handsets. It worked. There are more Android smartphones than Apple iPhones. The problem is that each phone runs different versions of its software and makes it confusing and difficult to manage. It also made it difficult to offer a consistent user experience and tools. With Pixel, Google is essentially trying to copy Apple’s ecosystem model and controlling how it rolls out Android and more significantly its content. It is making a concerted effort of trying to keep users within its ecosystem which Apple has done brilliantly. It’s also pricing the Pixel phones at a higher price point and almost at a similar level as Apple indicating it is going up market. Margins should improve. Initial reviews of the Pixel have been extremely positive.
The Google Home is an attempt to bring all the key information pillars in the Google ecosystem. Ask it questions (search), play music (Google Play/YouTube), control the lights and heating in your home (Nest). Here’s how it does it.
Yeah that’s pretty slick…and scary. Just like Apple was able to integrate various software components (iTunes, iMovie, iPhoto) into a seamless cross platform ecosystem. Google is trying to kick it up a notch by creating a seamless cross platform that integrates your daily actions. Apple does not offer this. It has Siri but it doesn’t have the hardware that measures up.
Question 2: Who do they compete with?
Google’s main competitors are other information/content creators and aggregators like Amazon, Apple, Facebook and Microsoft who are all trying to create similar ecosystems. Amazon and Apple are to an extent the closest competitor to Google.
Question 3: Who buys their products and services?
This is what’s fascinating. Unless you’re a business or an individual trying to sell something, most of Google’s services are free. Google developed anddistributes Android but they get no money for it? This has always flummoxed me. The financials say they are making money but I’ve always wondered how they make these insanes levels of cash? Who pays Google? When I see Pixel and Google Home, it then hits me.
Question 4: Will they buy their product over and over again?
We’re information starved and information bloated. As long as we have an element of curiosity, Google is a go to resource.
Question 5: Do they make money?
They make a ridiculous of amount of wealth. The company’s Returns On Invested Capital have tracked around 45 percent compared to it’s cost of capital of 10.7 percent. It is printing money.
Question 6: What do they own and who do they owe money to?
The balance sheet is impeccable. Current assets are 4 times greater than its Current Liabilities so there incredible levels of liquidity. The company has about $73 billion in cash compared to long term debts of $2 billion. The company is one of the most financially strong companies on the planet.
Question 7: How risky is their business?
A couple of things can slow Google down. One is someone builds a better algorithm that ups the ante on search. Many have tried and all have failed. Some think Facebook or Twitter could challenge it.
A second risk was revealed by the US election when it became evident that a great deal of misinformation and fake stories surfaced. The algorithms seemed to work so well that it could have potentially influenced how people voted. Google’s search algorithm can scrape the internet for content, but there the algorithm has no editorial capability to filter out the truth versus Un-Truth. If the credibility of information on Google is put into question, it will stop.
The third is itself. The company turned itself into a holding company so it could separate its core money making businesses from its playground R&D’ish businesses (classified as Big Bets). The Big Bets business is losing a lot of money and it will be interesting to see how it manages it.
Question 8: Is the stock cheap?
I bought in at $833 and again at $785 later in the month to lower the cost position. Several valuations I came across put a price of $1000 on the stock so there still appears to be some upside. On a relative basis the stock appears reasonably valued. I’ve always felt that Google’s stock was priced for perfection. The hyper growth rates I felt were never sustainable and I thought when growth slows down the stock would get destroyed. If it remains as a pure search company, I still think this is quite possible.
The way things are evolving, it looks like the next great battle will not be over content on mobile devices, but who will control how content is distributed in the home. With the introduction of Pixel and Google Home, Google is pivoting strong into that space and from what we’ve seen in the early days, there appears to be an interesting opportunity to for the company to take off to another level by broadening and leveraging their core value proposition …access to information….and I haven’t even talked about the monetization opportunities with YouTube and live streaming! It’s a best of breed technology company and with this paradigm it looked like a good opportunity to jump in and slowly build up a position.