Weekly Equity Idea Highlight - 2018 08 29
GOOGL has seen steady UAFRS-based (Uniform) ROA decline from 100%+ to 30% over the past 15 years as the company has aggressively invested to grow the business and their cash flow streams. Markets expect Uniform ROA (ROA') to continue to decline over the next five years, approaching 17% by 2022. Moreover, Uniform Asset growth is expected to be at the lower end of historical levels, at 15% a year. However, considering fundamental signals about the business, the market's expectations appear far too pessimistic.GOOGL had a material management change in October 2015, when the company created the Alphabet holding company structure, and CEO Page turned over true day-to-day operations to Google CEO Pichai and CFO Porat, a hire from Morgan Stanley who had been known for her focus on controlling costs. Since her first call, CFO Porat has highlighted how GOOGL would still be committed to investing in the business, but in a more rational way, with more focus on investing in opportunities with more visibility.
Prior to that call, whenever management discussed issues around their costs, including recruiting costs, R&D costs, and other costs, they consistently generated highly questionable markers. In the 10 calls since, management has consistently not generated negative markers when discussing issues of costs, signaling that they have these issues more under control. On top of that, in recent calls, when management has talked about growth factors, they have begun to grow more confident too, spelling reason to think fundamental momentum is building more positively.
Considering management's confidence about controlling costs and therefore not seeing Uniform ROA decline, and their improving outlook about growth, pessimistic market expectations for a rapid Uniform ROA decline appear too negative. There appears to be equity upside for GOOGL going forward.
Alphabet is a holding company. Through its subsidiaries, the company is engaged in a collection of businesses, which its primary business is Google. The company reports all non-Google businesses collectively as Other Bets. Google's main products and platforms are Android, Chrome, Gmail, Google Drive, Google Maps, Google Play, Search, and YouTube. The company also provides advertisers with tools that help them attribute and measure their advertising campaigns. In addition, Other Bets includes Access, Calico, CapitalG, GV, Verily, Waymo, and X, among others. Other Bets primarily engages in the sales of internet and TV services through Access as well as licensing and research and development services through Verily.
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