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.