It is rare to see shares of High-Quality Businesses trading at a very reasonable price for several years in a row.
Just look at Google’s parent company Alphabet. Isn’t it crazy that for instance from 2017 to 2020 you could have bought one stock of that wonderful business for around USD 1’000 WHILE in exact that time period Earnings per Share (EPS) have been marching up at around 20 % per year? I mean when do you see a company getting “cheaper” while in fact, it’s getting stronger and stronger?
Buying pieces of businesses of that quality, valued at 25 to 30 Price Earning Ratio (PE-Ratio) is rather rare.
While EPS steadily improved almost each and every year, Alphabet’s stock price has been very slow to move significantly higher. Seemingly the stock price was almost stagnant for a couple of years.
I get the fact that Alphabet’s dominance brings some issues and there are some clouds on the horizon that cannot be denied. I mean Alphabet has come under scrutiny from regulators and politicians from different countries (privacy issues etc.). Some investors are careful about that. I get that, there is some potential risk.
But let’s be real: Alphabet is getting more profitable year by year, does anybody think that this massive company can be easily stopped? Has Rockefeller’s Standard Oild Company ceased building enormous wealth after it had been split up? Of course not. On the contrary, it marked the beginning of an unprecedented area for “Oil millionaires” that just held their stocks through thick and thin and collected all the “spin-off shares” and increasing dividends after Standard Oil was literally cut into pieces.
Ok, there is another factor which in my view kept Alphabet’s stock muted for some time. Revenues mainly come from ads which makes it to some extent vulnerable. Growth in this area will slow and there is huge competition from Facebook, Amazon, etc.
Alphabet’s income mix is not as even and broad as the one of Microsoft or Apple for instance. So, I get it that Apple trades at a certain discount compared to these two behemoths.
But just look at that massive deep and broad economic moat Alphabet has built over the past few decades. Billions of people use the products and services of Alphabet day by day. Google has literally become synonymous with the internet which grows and grows and grows.
So yes, the bulk of the company’s profits comes from Google searches but also from user activity on platforms like Gmail, Google Maps, Google Play, and YouTube.
And there is so much more, like Chrome browser or the Android mobile operating system. Alphabet has made considerable investments in the Stadia cloud gaming system, Waymo self-driving vehicles, and other technologies. And just think of Alphabet’s stake in Elon Musk’s rocket company SpaceX and in Indian telecom company Jio. These participations not only have increased handsomely in market value but more importantly provide business opportunities for the future.
And Alphabet is slowly but surely getting more diversified. Its Cloud Business is growing substantially and will be an important future contributor to the company’s bottom line. So will Youtube, which has just started monetizing.
So, while Cloud Computing and Youtube provide huge profit potential there is much more. Artificial Intelligence, autonomous cars are just some more opportunities. And then of course there are Google maps, which could become a very interesting cash cow in a few years.
Besides its huge economic moat and almost unlimited business potential, I like in particular the company’s strong financials with a very robust profit growth while sitting on a cash pile of USD 130 Bn. Alphabet is extremely conservative, it has a very nice buyback program but does not pay any dividends to its shareholders.
I wonder sometimes whether Alphabet’s war chest is not too large. I mean which acquisition target of the size of USD 100 Bn would get the regulator’s approval. Given Alphabet’s dominance in several areas, it’s rather unlikely. So, don’t be surprised to see Alphabet start paying dividends five to ten years from now.
Alphabet inc stocks price has moved in tandem with its improved profitability and increased diversification of its income mix for some years. Given the economic recovery gaining steam after the COVID-19 pandemic lockdowns are more and more lifted, I’d not be too surprised to see a nice pick-up in Alphabet’s stock price movements. There won’t be huge jumps, it will be steadily, smoothly, but quite likely at a steeper rate. High-quality companies don’t remain undervalued for too long and Alphabet deserves a PE-Ratio of at least 35 given its growth and quality.
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