High Conviction Bets - GOOGL

I am starting a series of posts on stocks or securities where I have a high conviction that they will succeed. The first post also represents my biggest bet. Alphabet (GOOGL) is the parent company of Google. As of the date this article is being written, the following are the key metrics of this stock:

Market Cap: $553 B

·        Stock Price: $821.54

·        Forward P/E: 20.17

·        Revenue (TTM): $81B

·        Quarterly Revenue Growth: 21%

·        Quarterly Earnings Growth: 24%

Google is at the forefront of the digital economy. It is a major provider of information and analytics to companies and individuals around the world. In the larger context of things, I believe we are just scratching the surface of data and analytics usage. There is a lot of room for growth as the economy (as well as personal activities) shifts to the digital realm. The growth potential is several times higher in emerging economies like India. Google being the dominant player in most of these markets is extremely well positioned to reap benefits.

Considering this immense growth potential, I believe that a forward P/E of 20 is too cheap. The S&P 500, which would fairly represent a broad view of the overall US corporate world, trades at a forward P/E of 18. This implies that Google trades at a premium of 11% to the broader US corporate economy. If you take Nasdaq, which more closely represents the Information/Technology economy, the premium is reduced to just 5%. This doesn’t make sense to me. Considering the stability, market dominance and growth potential, GOOGL should be trading at least 20-25% premium to the broader market.

So far, I’ve discussed the core business of Alphabet, which deals with Google products that collect and monetize data. There are a lot of newer technologies that the company is betting on. This includes self-driving cars, AI and other more exciting ideas from the Google X Labs. Even if a fraction of these ideas succeed, they will provide a significant leg up to the company’s growth further into the digital era. I can see the company easily grow revenue and earnings by 20+% well into the next decade. That would imply a stock price appreciation of 10-15% or more YoY over the next 5-10 years.

Alphabet cannot deliver on these expectations unless it succeeds on 2-3 areas outside of its traditional advertising business. It could be Cloud or Cars or something else. But they will definitely need to make it big on at least a couple of these “other bets”.

A couple of risks/downsides:

·        Mobile – Though android dominates the OS market share, the premium segment continues to be dominated by Apple. This is leading to increased traffic acquisition costs to Alphabet. More importantly, as Apple controls this affluent base of consumers, it is that much more difficult for Alphabet to reach and monetize those consumers.

·        China – Google is not present in China due to government censorship. As a result, they are losing out on the most populous and soon to be the biggest middle class market in the world.

Considering the market dominance, growth potential and excellent management team, the risks seem manageable. To me, GOOGL is a growth stock with plenty of steam left to keep it runnig deep into the next decade and maybe the one after.

Why ULIPs are a great investment choice for NRIs

Back in 2007-08, I used to be a strong critic of ULIPs (Unit Linked Insurance Plans).  I would advise friends against investing in them. What pissed me off about these products was the high upfront commissions cost that ate into the premium so much that it would take years to show profits to the investor. On top of it, agents would use ridiculous market returns assumptions in illustrations shown to customers. It was normal to see illustrations assuming 15-20% annual returns that show astronomical returns to investors. Most investors would be bitterly disappointed with the returns seen in the first 2-3 years and either discontinue or withdraw prematurely, thus never realizing a net gain. Click here to see my post back in 2007 when I junked the MoneyPlus ULIP plan by LIC.

Fast forward to 2016, I am now a proponent of ULIPs. When I went to India on vacation this summer, I met my banker and as usual he started explaining this latest investment product. I thought, 'here we go again...'. But as I listened more and later researched the finer details on the website, I was pleasantly surprised to find that the new, refreshed ULIP product is more protected and advantageous to the investor. I ended to taking up a significant financial commitment, which I am confident will reap me good profits in the long run.

Thanks to IRDA and SEBI, the new rules and regulations put in place have greatly enhanced the value of these products in investors' portfolio. I now strongly believe that ULIPs are a great product to be included in the portfolio of any investor, and especially for a NRI. Following are my reasons:

• Low cost - Premium allocation charges have come down from around 20% to the 3-4% range
• More low cost - Longer term investors will enjoy very low fund mgmt charges of 1-1.5%, even for equity funds. These charges are even less than that of mutual funds. So, if you stay invested for 15-20 years or more, you will do better with the ULIP than with a comparable MF.
• Insurance - A 5 lakh per year investment will get you a minimum insurance cover of 50-60 lakhs. And you can add on to it. So, no need to shell out additional premium or do additional paperwork for another policy. And in case you were wondering, you will be covered regardless of where in the world you live.
• Tax - The most important feature I like about this product is that any capital gains and the entire withdrawal will be completely tax free in India. Of course, if you live in the US at the time of withdrawal, US tax rules will apply. However, if you entertain thoughts of returning to the motherland at some point, this is an attractive proposition. Think about it. You invest 25 lakhs over a 5 year period and stay invested for another 20 years. You return to India by then and withdraw a corpus of 1-1.5 crore rupees, totally tax free.
• Flexibility - This has always been the strength of ULIPs. Depending on your life stage and financial goals, you can reallocate your money between different fund classes - equity, debt, money market, etc.

Now, why do I say ULIPs are a great choice for NRIs? Well, ULIPs are great for any investor. But for US based investors, it is especially useful since taking exposure to Indian equities through the MF route is now much harder due to the FATCA regulations.

Finally, this is a great time for US NRIs to invest in India. The US equity markets are at a point where I see very little upside in the next 3-5 years. The same goes for Europe. Fixed return investments will return below inflation for the next 5-7 years. The only growth opportunity in the medium term lies in emerging markets. Within the EM bracket, India looks really good because of the significantly improved investment climate, encouraging start up ecosystem and a strong central government that has pushed through significant reforms like GST and FDI in key sectors like Defence and eCommerce.