Alphabet Inc - Ordinary Shares - Class A

Fundamentals

Written by Ophir Gottlieb, 12-02-2015
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PREFACE
A narrative had been forming for several years that Google as a core equity holding was dead -- a narrative which in many ways was ridiculous and totally disproved starting with the earnings release in Q2. Google stock is up 41% in the last six-months adding $154 billion to its market cap, which now towers above half a trillion dollars. Further, Google now has six services with over a billion users: YouTube, Android, Search, Maps, Chrome, and Google Play.

While there is a lot going on at the company, sometimes pictures worth much more than 1,000 words.

CHARTS
Let's start simple and then move to really interesting. Here is Google's all-time revenue (TTM) chart.



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Google revenue has broken $71 billion in the last year and is up 12.8% year-over-year and 32% in the last two-years. That's small cap growth in a mega-mega cap.


Next, let's turn to profitability. We have added Google's net income (TTM) over all-time in the orange line, on top of the revenue bars.



After a small hiccup in net income, the company has smashed to record highs. Google brought in Ruth Porat as CFO in May after serving as Morgan Stanley's CFO for five-years. In her first earnings season ever with Google, the company's stock gained more in market cap than any company ever in a single day ($65 billion).

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Today Google's net income (after tax profit) sits at $16.4 billion in the trailing-twelve-months (TTM), up 28% year-over-year. If that feels like it's absurdly large, it should. The year before, Google saw net income shrink. How's that for tight fiscal policy within a company making a massive change?

Let's compare Google's net income growth to the mega caps in technology, below. The x-axis is equal spaced (ranked) and the y-axis is net income growth (TTM) over the last year.



Yep, other than Apple, no other technology mega cap is growing earnings as quickly as Google.

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But let's look at the direct impact of Ruth Porat even more closely. Google was stuck in the mud with its free cash flow, and that is the ultimate measure of a stock's value. Check out this colossus change in levered free cash flow (TTM) since Ms. Porat came into town.



We're looking at levered free cash flow growth of over 100% in the last year and a rather staggering pop from two-quarters ago.

Let's next turn to book value per share. Book value is the net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. (Source: Investopedia).



We can see Google's book value is ripping higher and breaking all-time highs essentially every quarter in existence.

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In our second to last chart, let's look at how much Google is spending in R&D. We do this for two reasons. First, to show that the company is not sacrificing the future by cutting innovation right now. We also do it to demonstrate that there is no company in the world spending more on R&D than Google. Period.



Google is not only spending more than Amazon, Apple, Intel and Microsoft, but it's also spending more the Pfizer, Gilead and any other company in any other industry in the world.

Finally, with the stock ripping to new highs, valuation must be a concern. Here is Google's price to sales compared with these same mega tech companies.



While Google is on the upper end, it's hardly "off the charts." Given the revenue, free cash flow and net income growth, a higher than average valuation feels pretty fair.

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CONCLUSION
While behind the scenes there is a lot going on inside the behemoth that is Alphabet, sometimes it's just this simple. Google's stock is at all-time highs, but so is revenue, net income, free cash flow, book value and R&D.

Further, the company is moving into Android Wear, Android Pay, Android Auto (a self-driving car), Virtual Reality (to compete with Facebook's (FB) Oculus one presumes), a new Tablet called Project Tango amongst other things (yes, there is more). Of course, first and foremost, it's ads, click rates and click rate growth.

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