12/2021
2021 marks my 10th year investing in Google or Alphabet (GOOGL; GOOG).And I just achieved a return of 1,000% or 10x my investment in Google or Alphabet when GOOGL hit US$3,000 and closed at US$2,837.95 at month-end 30 Nov 2021.
I first invested in GOOGL in 2012 when its acquisition of Motorola Mobility sent its share price down to below US$300 as markets had perceived that the price paid of US$12.5 billion was excessive and was not sure if Motorola could take on the incumbents Apple and Samsung. And markets were right – GOOGL had to sell off Motorola in for US$2.91 billion for a loss of almost $10 billion in 2014 to Lenovo.
Over the decade, I have continued to add GOOGL to my investment portfolio in addition to my earlier buy at US$280 – US$300 during market corrections. Why did I buy into GOOGL and why have I continued to buy into them throughout the last ten years?
1. Buy into businesses that will flourish in the long term as the Total Addressable Market, TAM is huge
GOOGL benefits from a network effect. Each search is used to calibrate future search results. Thus, the more searches, the better the results. The better the results, the better will be future searches. Needless to say, like honey attracted to bees, as the results get better, advertisers are attracted to it despite higher advertising rates. Thus, over the last ten years, GOOGL has emerged as the Number 1 online media company and continues to entrench itself.
GOOGL registered net profit of US$10.737 billion in 2012. 10 years later, GOOGL earns net profit of more than $15 billion in a single quarter, 50% more in a quarter than it does in a year in 2012 or 600% more compared to 10 years ago on a 10-year-to-10-year comparison. GOOGL posted net profit of US$18.936 billion in its latest 3Q2021 results which implies that it makes an average of US$6 billion every other month or $200 million every other day! Google continues to make so much money as the text-based ads to the right of the search results are so incredibly profitable.
2. A strong brand that gives it sustainable competitive advantage
GOOGL is one of the rare classes of businesses where the name is the brand. Most people do not search for something, they google it. Thus, google has become a verb and that is exemplified into how strong its economic moat has become.
GOOGL registered cash balance of US14.778 billion and marketable securities, MS of US$33.310 billion in 2012 when I first bought into it. Cash + MS was then US$18.109 billion. It has short-term debt of US$2,549 billion and long-term debt of $2,988 billion. Thus, the Net Cash ie Cash – Debt = US$12.572 billion. Its business ran on total assets of US$93.798 billion and stockholders’ equity of US$71.715 billion.
This meant that its ROIC, a key metric that I used to sieve out profitable businesses that optimizes its capital structure was 17.19%. In fact, for the next four years, GOOGL continued to post very strong ROIC of 15%. For more of how we use and teach ROIC as an strong indicator of finding winning stocks, do read our past detailed research at https://gcpglobalsg.wixsite.com/gcpglobal/post/keeping-faith-with-faamg-big-tech-still-the-most-defensive-rewarding
10 years later, GOOGL cash balance has ballooned to US$23.719 billion and marketable securities of US$118.284 billion or a total of US$142.003 billion. This is almost an 8x increase from 2012! By 3Q2021, GOOGL no longer has short-term debt while its long-term debt has increased to US$14.288 billion. Thus, the net Cash + MS – Debt = US$127.715 billion. This is 10x equivalent amount in 2012!
3. Buy into lucrative businesses at reasonable values rather than on the cheap
The father of value investing is Benjamin Graham and Warren Buffett has popularized value investing.
Value investing proposes that whether stocks are worth buying or not depends on certain gauges like price-to-book value, low PER multiple to meet a margin-of-safety requirement.
Warren was a student of Ben Graham, like some of my other idols like Walter Stross and Irving Kahn. Graham’s emphasis on picking cigar-butt stocks tantamount to catalyst-driven investments, popular during the 1950s and 1960s, but have become harder after the nifty-fifties as investment funds and stocks become too big to invest consistently using the original value investing principles.
Warren actually acknowledges in his Berkshire Hathaway letter to shareholder that “cigar-butt strategies worked well when I was managing small sums”. Berkshire’s investments henceforth have concentrated on higher-than-typical PER and P/BV multiples like Apple, Amazon and Snowflake in its latest 13F filing with the SEC. These stocks are still value stocks as they possess significant competitive advantages that are sustainable in the long run. These made their businesses lucrative in the long run.
At GCP Global we subscribe and practice value investing by concentrating on finding businesses that possess significant competitive advantages that are lucrative in the long run. See how we tripled our profits in just 3 years at https://gcpglobalsg.wixsite.com/gcpglobal/post/triple-your-wealth-in-three-years-with-global-tech-stocks
We use ROIC and Net Income Margin and a few other key metrics to guide us. For example, GOOGL net profit margin in the past 10 years are –
Evidently, it is clear that GOOGL has been a very profitable business with Net Income margin of more than 21% in almost every other year in the past ten years. The only exception was in 2017 when net profit was affected by an almost $10 billion increase in Provision for income tax from US$4,672 billion in 2016 to US$14,531 billion in 2017.
So, while GOOGL has returned 10x for me since my first investment price of US$280 – US$300 in 2012, I continue to add to my holdings as the profitable metrics, cash and ROIC continue to improve with each passing year. We agree with Warren that “the best investments are the ones that you can hold forever” without the need to sell.
Table 3 – While GOOGL has returned 10x for me since my first investment price of US$280 – US$300 in 2012, I continue to add to my holdings as the profitable metrics, cash and ROIC continue to improve with each passing year
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