00:00 Alphabet or Google stock climbed 11% last week after reporting Q1 earnings.
00:05 The company now has a market cap of $1.48 trillion. With $26 billion of cash and $14
00:12 billion of long term debt, the enterprise value is roughly $1.47 trillion.
00:16 Q1 results showed a 3% increase in revenue to $69.8 billion,
00:21 but there was an 8% decrease in net income.
00:24 Over the last 12 months, Google has now reported $285 billion of revenue, $55.6 billion of net
00:31 income and $62 billion of free cash flow. So the company is valued at 5.2 times revenue,
00:37 25 times earnings and 24 times free cash flow.
00:40 As I mentioned, Google's earnings dropped last quarter, but the stock still went up
00:45 because investors were pleased with the company's performance in Google Cloud.
00:49 Cloud is a lucrative and promising business and the 28% increase in revenue was more than
00:54 recorded by Amazon's AWS and roughly on a par with Microsoft's Azure. Market share gains in
01:00 this segment is a very positive sign, and investors were also encouraged by the company's progress in
01:06 AI. When OpenAI introduced ChatGPT, Alphabet's stock plummeted by around 15%, but in a conference
01:14 last week, Google began to take back the AI narrative when it unveiled new features for
01:18 its own AI tool, BARD. Unlike ChatGPT, BARD can access images and its training is not cut off in
01:25 2021. ChatGPT is still better at certain tasks, but BARD is now holding its own and it's too early
01:32 to say who is actually leading the AI race. And even if users do prefer BARD, we still don't
01:38 know how Alphabet plans to monetise that product. Let's consider a scenario where Alphabet grows
01:44 revenue at 10% per year for the next 10 years, then operates with a 20% net margin, which is
01:49 slightly lower than its historical average. That would see the company produce $162 billion of net
01:55 income in 10 years time. Apply a 25 times multiple to that figure gets us to a market cap of $4
02:02 trillion, which works out to an investment return of 10.7% per year. On the one hand, Alphabet is in
02:09 an excellent position, with a monopoly in search and promising growth in Google Cloud. On the other
02:14 hand, top line revenue appears to be slowing and net income has now declined for four quarters
02:20 out of the last five. Those trends are a bit concerning and there's a chance of Microsoft
02:25 Bing taking market share. But the future of AI may become concentrated amongst just a few powerful
02:31 firms and I think Alphabet could be one of them, which is why I continue to give the stock a
02:36 bullish rating. But these are my personal opinions, not financial advice and I do have a position in
02:41 Alphabet stock. For more detailed analysis, visit our website overlookedalpha.com.
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