Weekly Equity Idea Highlight - 2020 05 04
GOOGL has seen steady UAFRS-based (Uniform) ROA decline from 80%+ to 25% 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 declining over the next five years, approaching 12% by 2024. 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. Since then, returns plateaued at around 30%, until 2018-2019, when regulatory overhangs caused GOOGL to have to start investing in compliance and security, technology which pulled down returns.
GOOGL had appeared to get past that, and it appeared Uniform ROA was plateauing in 2019-2020 before the coronavirus caused a short-term slow-down. This is confirmed in recent Earnings Call Forensics, as management has showed confidence about fundamental growth across their business segments, from search/advertising, to YouTube, and G Suite.
Considering management's confidence about seeing a fundamental inflection, 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.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.