The reason why I’m investing in Alphabet(Google) / 4th industrial revolution

Of course, everyone knows Google. Search, save photos, youtube and others. We use Android unless you are a iPhone user. Google is the most famous search engine in the World. It owns Youtube which is also one of the biggest video platform in the World. Now, Google is treated as a proper noun. When you tell someone to search, we say “google it”. Usually don’t say “search it”. Like this, Google is closely linked to our lives.

About Alphabet

Alphabet is a holding company. Google and other companies are included under Alphabet. Under Google, there are Android, Youtube, Search Engine, Ads, clouds, etc. Android dominates the mobile Operating System market with 86.1% of market share. Whereas ios’s market share is only 13.9%. The market share of Google’s search engine is 92.26%. That’s huge. The second player is Bing which market share is only 2.93%. That’s huge gap. It would be hard to google to lose at search engine market. In the web browser market, google takes the market share of 66.3% and the second player safari takes 16.76%. When we have a look at these market shares in each sector, the gap between 1st and 2nd is enormous. That would be good may be because google has the low probability of collapse.

The Alphabets business is very diversified. Calico, Nest, Side Walk, GV, X, Jigsaw, Verily, Deepmind, Waymo, Capital, Acces & Energy and Google. Looking at Alphabets businesses , it looks like it is related to the 4th industrial revolution. Looking at Alphabet’s future, there are Ambient Computing, Hardware(Chromebook), Artificial Intelligence, Smart Home & IoT, Robotics, Self-Driving, Healthcare, Gaming, Media, Internet in a ballon, Space Travel.

Also, Alphabet’s Research & Development expenses are increasing steadily. This point shows that it is preparing the future well.

Earnings

 

 

Alphabet’s market estimated EPS(Earnings Per Share) was 11.28, but the actual EPS is 16.4. It outperformed the estimated EPS by 45.3%. Also, the market estimated revenue was 42.8B, but the actual revenue was 46.17B. It outperformed the estimated revenue by 7.6%. We can say they showed us an earning surprise.

Looking at the earnings, the proportion Google‘s revenue is 99.6% of the total Alphabet’s revenue. Other bets’ proportion which has only 178M of revenue and 1.1B lose is 0.3%. Yet, the other businesses shows lose, but it seems like it will show good growth.

The expected EPS growth in 2021 is 20.33%. It may would show a good EPS growth. The expected revenue growth in 2021 is 19.80%. The expected revenue growth also may would show a good growth.

Predicted stock price / not 100% accurate

The method to calculate the predicted stock price of Alphabet in 2025 is Price to Earnings Ratio(PER) X EPS(predicted) and Revenue Per Share(R/S, predicted) X Price to Sales Ratio(P/S).

First Method
Alphabets past 5 years average PER is about 33.7 and the expected EPS is about 112.84. Therefore, 33.7 X 112.84 = about $3802.708. As current stock price is $1771.43, we may would expect about 114% increase. If it maintains higher multiple, we may would expect higher return.

Second Method
The expacted Revenue Per Share in 2025 is about 554.74 and the past 5 years average Price to Sales Ratio is about 6.4. Therefore, 554.74 X 6.4 = about $3550.3. As current stock price is $1771.43, we may would expect about 104% increase.

Valuation

Alphabet’s current Price to Earnings Ratio is 34.09. Nasdaq’s average PER is about 21.50. The sector median is 19.21. Therefore, may think it’s overvalued relatively, but in view of the past 5 years average PER which is 34.57, I think it is not that overvalued.

Current PEF ratio is 1.55. In view of Nasdaq’s average is 2.40, I think it is fine

Opinion about valuation may vary by people. This is my pesonal opinion.

Conclusion

The reason why I think Alphabet is attractive is because of its market share in the digital ad share market and the technologies of other bussinesses. However, I think the ambiguous reason is the proportion of ads is too high in their bussiness sectors. Google’s cloud revenue has increased 45%. As the cloud market itself is growing, I think Alphabet has capacity to grow, but it also correspond to Amazon and Microsoft. AWS has grown 29% and AZURE has grown 48%.

I think Alphabet is a good company and it will be a good company in the future. I may increase the proportion of Alpabet in my stock portfolio.

I’m not an expert. There might be some of incorrect information. The investor itself is responsible for the decision and investment.