Alphabet (NASDAQ: GOOGL)
QVI Research Report | Updated Coverage | May 2023
Summary
Alphabet and its Google brands dominate search, data analytics, maps, mobile devices, web browsing, collaboration, and video, and it is a rising star in the cloud and artificial intelligence.
Fundamentals suggest that Alphabet’s management continues its stellar 25-year history of a high-quality business model with low downside risks.
However, shareholder yields and valuation multiples suggest Alphabet’s stock price remains lofty.
Nevertheless, Quality Value Investing maintains its previous view of the Class A voting shares in this updated research report.
Contributing Editor’s Notes: Premium (paying) subscribers, when referencing this research report, access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on May 15, 2023, and intended for illustration only. Alphabet's Class A voting shares are used for the data analysis. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
Alphabet Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Alphabet, Inc. (NASDAQ: GOOGL) is a non-dividend-paying large-cap stock in the communications services sector’s interactive media and services industry. GOOGL was added to the QVI Concentrated Portfolio on February 23, 2022, at a split-adjusted $127.59 a share.
Alphabet Inc. offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America. It operates through Google Services, Google Cloud, and Other Bets segments.
The Google Services segment provides products and services, including ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube. It is also involved in the sale of apps and in-app purchases and digital content in the Google Play store; and Fitbit wearable devices, Google Nest home products, Pixel phones, and other devices, as well as in the provision of YouTube non-advertising services.
The Google Cloud segment offers infrastructure, cybersecurity, data, analytics, AI, and machine learning, and other services; Google Workspace that includes cloud-based collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar, and Meet; and other services for enterprise customers.
The Other Bets segment sells health technology and internet services.
The company was founded in 1998 and is headquartered in Mountain View, California, USA.
QVI’s value proposition elevator pitch for Alphabet:
Alphabet dominates search, data analytics, and maps with Google, mobile devices with Android, web browsing with Chrome, collaboration with Gmail and Drive, and video with YouTube, and it’s a rising star in the cloud and artificial intelligence.
Performance vs. Sector and Market
The chart below illustrates GOOGL’s performance against the Communication Services Select Sector SPDR® Fund ETF (NYSE: XLC) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of Alphabet in February 2022.
For example, GOOGL has matched its sector while underperforming the broader market in total return during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Alphabet’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Alphabet: Bullish.
GOOGL Total Return vs. XLC and SPY
Alphabet Inc (GOOGL) Total Return: -7.90%
Communication Services Sel Sect SPDR ETF (XLC) TR: -7.86%
SPDR S&P 500 ETF Trust (SPY) Total Return: -0.49%
Since February 23, 2022 (as of May 15, 2023)GOOGL Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
GOOGL’s earnings yield traded below the QVI targeted floor at 3.85%, as demonstrated in the below chart. In addition, at 4.08%, GOOGL’s free cash flow yield traded under the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that GOOGL trades at a premium. QVI will further explore valuation multiples later in this report.
Dividend Yield
Alphabet does not pay a dividend.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.50% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for GOOGL was 2.64% or -86 basis points [bps] below the 10-Year.
QVI’s shareholder yields rating for GOOGL: Neutral.
GOOGL Shareholder Yields
Alphabet Inc (GOOGL) Price: $116.50
Alphabet Inc (GOOGL) Earnings Yield: 3.85%
Alphabet Inc (GOOGL) Free Cash Flow Yield: 4.08%
Alphabet Inc (GOOGL) Dividend Yield: 0.00%
One-Year Trailing (as of May 15, 2023)Alphabet Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Alphabet had positive three-year annualized double-digit revenue growth of 20.45%, far outperforming the 5.28% median growth of the communications services sector.
Farther down the income statement, Alphabet had a trailing three-year double-digit net profit margin of 24.82%, trouncing the sector’s median low-single-digit net margin of 2.81%.
Returns on Equity and Invested Capital
Alphabet’s management produced a trailing three-year return on equity or ROE of 25.23%, surpassing the targeted threshold and embarrassing the sector’s median ROE of 3.02%
Stock buyback programs often elevate ROE. For example, in late April of this year, Alphabet’s board of directors authorized an additional $70 billion in stock buybacks after announcing an identical dollar amount repurchase in April 2022.
At 24.06%, Alphabet’s three-year return on invested capital, or ROIC, was above the QVI threshold and far outperformed the sector’s median ROIC of 3.68%, indicating that its senior executives are outstanding capital allocators.
In addition, Alphabet’s ROIC more than doubled its weighted average cost of capital, or WACC, of 10.54%. (Source of WACC: GuruFocus).
Double-digit revenue growth and net profit margin, plus robust, sector-beating returns on equity and invested capital, suggest that Alphabet’s management continues its stellar 25-year history of 2nd-level performance in Mountain View.
QVI’s fundamentals rating for Alphabet: Bullish.
GOOGL Returns on Management
Alphabet Inc (GOOGL) Revenue (3y Growth): 20.45%
Alphabet Inc (GOOGL) Profit Margin (3y Median): 24.82%
Alphabet Inc (GOOGL) ROE (3y Median): 25.23%
Alphabet Inc (GOOGL) ROIC (3y Median): 24.06%
Three-Year Trailing (as of May 15, 2023)GOOGL Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Alphabet, Inc. (GOOGL), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through direct ownership of common shares of GOOGL in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. David and his wife, Suzan, reside in historic South Central Pennsylvania, USA.
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