Alphabet Inc. (NASDAQ:GOOG) advertising business as an umbrella term has masked the underlying drivers of business
Looking under the hood of Google’s (NASDAQ: GOOG) businesses, we find that while the company’s distributed infrastructure has been beaten into shape to be sold as cloud, not much has been done with Google’s geo-services offerings or Google Maps. Over the subsequent discussion, we detail out what makes Maps an underappreciated asset, capable of catapulting Google’s valuation to double its current levels.
That unconventional spirit has been a driving force throughout our history – inspiring us to do things like rethink the mobile device ecosystem with Android and map the world with Google Maps.
Source: Business overview, Google 10K for 2018
Interestingly, only a couple of businesses make it to the first few lines of the 10K.
Google’s core business is fairly stable and we thus value it on a DCF basis with a discount rate of 7.5% and a terminal growth rate of 1.7%, arrived at by looking at the long term growth rates of the revenue and FCF. We arrive at a DCF value of $1,226 billion or a price to 2021 FCF of 25x, representing a 4% FCF yield, which is quite inexpensive considering where the 10 yr is trading at. Even adjusting for risk (primarily from regulation), we think 4% provides a sufficient cushion. At our expected 2021 FCF of $49 billion, the core business in itself has an upside of over 50%.
Icing, cherry and more
We value all the other three businesses on a P/S basis, primarily to reflect the startup-like revenue acceleration in these ventures.
- For the chat business, while Facebook had acquired Whatsapp for $19 billion at 190x revenue, we think a sane multiple for an in-house chat venture could be in the range of 15-20x. Going with the lower end of the range, at 16x sales, we think Google’s location-based chat could be worth $260 billion.
- For the ride-sharing business, comparable companies such as Uber and Lyft (NSADAQ: LYFT) trade at 5-7x sales. Considering the limited need for marketing, shared cost base and an advertising-driven revenue model, we expect Google’s ride-sharing to garner a higher multiple at 10x. Although not much compared with the scale of Google’s other businesses, ride-sharing could add another $10 billion-plus to the overall business.
- For the commerce business, PayPal (NASDAQ: PYPL) and Square (NYSE: SQ) trade at 7-8x, while Visa (NYSE: V) and Mastercard (NYSE: MA) trade at 18x. We expect Google’s location advantage to be able to achieve socially driven fulfilment (search, buy, transact, deliver), leading to a multiple that is closer to the upper end of the band. At an estimated revenue of $21 billion in 2021, the commerce business could be worth $340 billion.
Notably, most (rather all) of these use cases are likely to earn back the capital invested in them since the backend would be that of Google (unlike most tech plays who keep struggling with tying technology to business), the marginal cost of marketing to a captive audience should be minimal and the advertising-based revenue model will be operated by the company which had mastered it in the first place.
Although Google has not been very successful in some of its consumer ventures in the past, the downside risks to our thesis are less from execution and more from regulation. Recently President Trump had raised concerns about Google potentially working with China and engaging in illegal election activities.
It is no secret that big tech has been under the scrutiny of regulators throughout the world and should another EU-like fine come about, it could dent Google’s cash flows. Although to derail our thesis on Google, more serious sweeping changes to data policies would be needed. An example could be regulation forcing Google to pivot its business model to a subscription-based model (Option 2).
Overall, the bias in prices is: Upwards.
Note: this chart shows extraordinary price action to the upside.
By the way, prices are vulnerable to a correction towards 1,152.34.
The projected upper bound is: 1,245.83.
The projected lower bound is: 1,106.43.
The projected closing price is: 1,176.13.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 3 white candles and 7 black candles for a net of 4 black candles. During the past 50 bars, there have been 24 white candles and 26 black candles for a net of 2 black candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 73.5852. This is not an overbought or oversold reading. The last signal was a buy 3 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 51.71. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 9 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -33. This is not a topping or bottoming area. The last signal was a sell 8 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 4 period(s) ago.
Rex Takasugi – TD Profile
ALPHABET INC C closed down -13.300 at 1,174.710. Volume was 34% below average (neutral) and Bollinger Bands were 20% wider than normal.
Open High Low Close Volume___
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 1,190.86 1,128.70 1,120.97
Volatility: 31 39 37
Volume: 1,581,029 1,593,657 1,637,533
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
ALPHABET INC C is currently 4.8% above its 200-period moving average and is in an upward trend. Volatility is high as compared to the average volatility over the last 10 periods. Our volume indicators reflect moderate flows of volume out of GOOG.O (mildly bearish). Our trend forecasting oscillators are currently bullish on GOOG.O and have had this outlook for the last 36 periods.
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