Crunching some financial numbers for Alphabet

Over the last two decades, Google parent company Alphabet and social media giant Facebook have become Tech behemoths that not only benefit from the secular trend towards digitalization but even enforce these dynamics and are responsible for deep changes in our daily lives.

Every day, billions and billions of people all over the world use services, platforms, and applications of Alphabet, for instance

  • for Google searches
  • by watching Youtube
  • by writing e-mails via Gmail
  • by using Google play or
  • searching via Google Maps
  • working on Google Cloud
  • etc.

There are sheer uncountable occasions each and one of us interacts with Alphabet in one or another way.

Facebook is equally deeply embedded in the way we communicate, make business, work and structure our social lives. Facebook is a massive group with multi-billion properties from

  • Facebook (the social network)
  • Facebook Messenger
  • Facebook Shop
  • Instagram
  • WhatsApp
  • etc.

The Facebook group provides a huge ecosystem for messaging, networking, style promotion, photos, doing business, etc.

Both Alphabet and Facebook alike have created huge wealth for their shareholders. But their growth is far from over, in fact, these two behemoths grow more and more profitable.

In our article Alphabet’s stock keeps climbing so smoothly, we described the fact, that Alphabet has shown steadily growing Earnings per Share and that its market valuation more or less moved in synchrony to its increasing profitability. Exactly the same is the case for Facebook, the attractive blue-chip stalwart.

Now, let’s focus on Alphabet and take a closer look at how incredible of a money machine that company has become and how much potential is still left, making that business likely to further to go.

A glance at the income statement of Alphabet

As in the past, Alphabet boosted its top and bottom line on a year-over-year basis, bringing total revenues from around USD 162 Bn in 2019 to over USD 183 Bn in 2020, an increase of around 13 %. Alphabet’s net income though got a stronger boost, by 17 %. This is due to the fact, that Alphabet obviously streamlined its cost structure, you can see that expenses just grew by 11 %.

When revenues grow faster than expenditures, we speak of a Positive Jaws Ratio which signals increased profitability (you can find here an article on How the Jaws Ratio is used to improve finances of businesses and households alike).

Now, bearing in mind Alphabet’s 17 % net income boost from 2019 to 2020, let’s have a look at another very interesting factor. Alphabet’s share count was reduced by 1.7 %. Does not look much, does it? Well, let’s not forget, that Alphabet has a market value of USD 1.7 Trillion. Alphabet is a company that buys back its own shares in the tens of billions each year. This goes alongside growing profits and a stock price that is never overly expensive, which makes Alphabet’s share repurchase programs one of the very few extremely effective and efficient ones. It puts the power of the compound effect on steroids so to say.

Diluted earnings per share (EPS) moved from USD 49.16 to USD 58.61, representing an increase by 20 % from 2019 EPS to 2020s.

Now, in that time-stretch Alphabet’s stock price increased by almost 40 % and one could ask: did Alphabet’s shares move ahead of the company’s profitability?

Well, let’s try to make a view into the future, by using the most current financial information of Alphabet and then extrapolate.

Comparing the first quarter of 2021 to the quarter ended March 31, 2020, it becomes imminently clear, how extremely profitable Alphabet is. Not only is that company to grow revenues significantly faster than its cost basis, but the dynamic of the bottom-line growth is breathtaking, bringing it to 32 % on a Year Year basis, with an improvement of the operating margin from 19 % to 30 %.

Now, keep in mind, that Alphabet also constantly buys back roughly 1.5 to 2 % of its shares each and every year.

These factors combined are incredible: Diluted EPS literally jumped Year over Year by 266 % to USD 26.29 for the first quarter of 2021.

If Alphabet can keep that momentum for the whole of 2021, we are talking about over USD 100 forward EPS (2020 EPS: USD 59). This would bring Earnings Per Share Ratio (PE-ratio) on the basis of the current stock price to just 24 which clearly is below the average PE-ratio of the last years, ranging from 25 to 30.

Again, as an investor, it’s absolutely essential to put stock price developments in context to the business fundamentals, which in the case of Alphabet speak in favor of a rather undervalued stock price.

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

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