My Thoughts on Google

​Google (official name is Alphabet) is one of the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) that traditional value investors tend to avoid.  FAANG as a group is considered too popular and too expensive for a value investor, but it’s probably not fair to group them all together.  Amazon is an amazing company I would love to own but 70x earnings is too rich for me.  Same thing with Netflix which trades at 100x earnings. Google however trades at 23.6x earnings.

​Google (official name is Alphabet) is one of the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) that traditional value investors tend to avoid.  FAANG as a group is considered too popular and too expensive for a value investor, but it’s probably not fair to group them all together.  Amazon is an amazing company I would love to own but 70x earnings is too rich for me.  Same thing with Netflix which trades at 100x earnings. Google however trades at 23.6x earnings.

Looking deeper into the company, I would make some adjustments to this Price/Earnings (P/E) ratio:

1)      When doing a valuation of a company, you need to adjust for the cash and debt they have on their balance sheet.   Google has an incredibly strong balance sheet with $114B in cash and only $4B in debt.  This adjustment takes the P/E ratio down to 20.2
2)      Google has several smaller companies they call “other bets”.  These are early projects that are currently losing money but could end up being big winners in the future.  As a group, the other bets are losing about $4.50 per share.  If they wanted to, they could shut these down tomorrow and increase earnings by $4.50 per share.  If you exclude these other bets, the P/E ratio becomes 18.4
3)      The final adjustment I would make is for Waymo.  Waymo is the world leader in autonomous vehicles.  Currently it is rolled into “other bets” which means the P/E ratio is not giving any credit to this valuable business.  A recent Barron’s article put the value of Waymo at $50B.  I have seen valuation estimates anywhere from $35B to $175B for Waymo.  If we take the low end and assume it’s worth $35B the P/E ratio would come down to 17.4 for Google’s remaining business.

A P/E ratio of 17.4 is reasonable for an average company but is Google an average company? 

·         They have eight major platforms that each have over a billion monthly active users. 
·         Their android software runs 75% of the world’s smartphones
·         They control 90% of global internet search
·         YouTube streams over a billion hours a day
·         I use four of their products daily (Search, gmail, calendar, android) and an additional two of their products weekly (maps and YouTube)

The big negative for Google is the recently announced Department of Justice investigation.  The DOJ is investigating Google and Apple and the FTC is investigating Facebook and Amazon. In the past, these investigations have dragged on for years. 

I expect the attacks on big tech from Washington to continue well past the 2020 election, giving the FAANG names plenty of headline risk.  It may even create much better entry points for buying the stock.  If you are a trader, these are probably not the names you want to own.  However, if you are an investor planning to hold for the long term, these periods of uncertainty can create opportunities to buy world class companies at reasonable valuations.   





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