GOOGL Research Notes

Topics: Google, Advertising, Data Privacy

Price: 88.23 

Google, no wait sorry…. ✨Alphabet✨ is trading at just north of 80 bucks a share. That’s good for a ~40% decrease over the year. Merry Christmas! At least you got a sizeable tax write-off (if you sold).

Technicals

Par for the course with all our other tech stonks, though MACD suggests that it's oversold.

Financials

If you ever thought to yourself, “Huh, lemme Google that!”, then you already know Google’s edge: they give you the information you want, whenever you want it. The only catch is that they use your information whenever they want it, but they specifically want to use it to sell you products through targeted ads (though this probably isn't a surprise to you).

Product segments are included below, with advertising from Google, Youtube, and other Google Networks generating the largest amount of revenue.

Fun fact for you stonk scientists out there: the advertising and other services segment (collectively “Google Services” – but more like “Google Serving you more Ads" amiright) is the only profitable business segment of the company. It generates $~65B of operating income, while Google Cloud and the “Other” business segments have generated losses of $2.5B and $4.5B YTD 9/31/2022. While Google Services is profitable, its profitability is down over the prior YTD period due to higher compensation, hardware costs, and advertising expenses. Also, how ironic is it that an advertiser spends money to advertise haha.

Google is moving to cut costs as advertisers continue to reduce spending, which will likely materially impact their profitability. The most recent cost-cutting victim has been Waze, as Google has announced plans to merge Waze and Google Maps. Don’t worry, Waze will remain its own app (for now).

Products and Innovation

My mom loves YouTube TV, I hope she likes AI, robotic surgery, and self-driving cars, because those are only some of the investments Google has made in the future.

Given their stream of steady cash flow, I’m not overly concerned about their ability to finance R&D, which was $38B as of 9/2022 TTM.

Valuation

Given their future growth prospects, it certainly appears that Google is trading at a discount.

Despite the contraction of valuation multiples, the uncertainty surrounding future revenue and profitability should not be understated. The reduction in advertisement spending directly impacts Google's future profitability (and hence cash flow, which will influence its valuation). Despite this, Google's PEG is 1.02 which, for a company as large and influential as Google, is quite low.

Leverage: What Leverage?

Again, leverage here is largely immaterial. With cash of $116B and debt of $29B, that cushion of 4x cash-to-debt should help you sleep at night.

Other Notable Attributes

Have I mentioned they know pretty much everything about you already?

Recommendation: She’s nice, but I’m just not ready to date right now

Given macroeconomic forecasts that are currently projecting a less-than-ideal economic climate for 2023, it's a strong possibility that advertisement spending continues to decline or stagnate, hurting Google's revenue and profitability. If you want to take advantage of Google's lower valuation, you need to be very comfortable with a significant amount of price volatility, as data surrounding ad spending will be very important for Google (so sorry, Alphabet).