The company that’s often being used as a verb.
Our best friend when finding answers to our questions.
It was a no-brainer for me to initiate a starter position following the company’s drop in share price owing to its Gemini debacle.
What happened?
The short answer: Google it (just kidding).
The unfortunate series of events couldn’t have come at a worse time, when their competitors (most notably Microsoft’s partnership with OpenAI and its search engine, Bing) have all strengthened their AI offering.
It started with Bard’s fumble, coming up with inaccurate information in a promotional video.
Then Gemini followed suit.
When asked to generate an image of a white person, Gemini could only generate pictures of black people.
This has led to many questioning the management, wondering if they are the right people to take the company forward.
Doubts over how management are running a company are not new in the business landscape.
In 2022, there were similar questions surrounding the management capabilities of Mark Zuckerberg, which caused the sharp decline in Meta’s share price.
While valuations are attractive after the fall in Alphabet’s share price, the magnitude of the drop is significantly smaller than Facebook’s back then (as we’ll see below). Where Facebook (now Meta)’s stock price fell by >70%, Alphabet’s share price only fell by 10% - 15%.
It’s a buy, but certainty not a screaming buy as with Meta in 2022.
With the rise of AI, most notably ChatGPT (owned by Microsoft), there was much speculation about Google’s continued dominance in the search engine market.
Microsoft’s Bing managed to slightly increase its share (from 2.81% in Feb 2023 to 3.32% in Feb 2024) of the search market market worldwide.
While their market share has dipped (from 93.37% to 91.61%), Google still remains as the King of Search.
Realistically, for a company holding >90% of market share, it’s hard to capture any more of the pie.
While there are talks of AI disrupting the company’s business model, Google has a wide economic moat from its network effect and brand equity.
How the company makes money
Alphabet is a collection of businesses, with Google being its largest.
The company reports in 3 main segments:
Google Services
Google Cloud
Other Bets
Google Services generates revenues primarily by delivering both performance and brand advertising that appears on Google Search & other properties, YouTube, and Google Network partners' properties ("Google Network properties")
Performance advertising creates and delivers relevant ads that users will click on leading to direct engagement with advertisers.
Brand advertising helps enhance users' awareness of and affinity for advertisers' products and services, through videos, text, images, and other interactive ads that run across various devices.
As long as Google remain the search engine of choice, advertisers will continue to spend on the platform.
The uncertainty lies in how AI or other search engines like Bing disrupts this moat of Google.
That said, let’s not forget that Alphabet owns two of the most important properties of the Internet today — Google Search and YouTube.
For now, its market position seems safe.
How much is the company worth?
While intrinsic value is a range rather than a specific number, it is helpful for investors to come up with an estimate for how much a company is worth.
Using a simple DCF gives me an intrinsic value of $175 for GOOGL.
Using a simple DCF gives me an intrinsic value of $175 for GOOGL.
While this figure is by no means set in stone, it gives me a sense on whether the company may be undervalued.
After all, just because the stock price has fallen doesn’t make the stock a good buy.
I have 2 criteria when buying a stock.
The company must be at least 20% undervalued.
The price that I am buying at is one of the key support levels I have identified.
Since both of my criteria were met, I entered my first tranche. If the stock were to drop further and hit my second level (at $123), that’s where I’ll enter my second tranche.
When investing in anything, I’ve found that it’s important to enter in stages, and not buy a full position at once.
Yes, this may mean you get lesser profits if the stock shoots up. But psychologically, it’s easier to handle if the stock price continues to fall.
What are insiders saying?
One clue as to whether the stock is at a good price is to check at what price the share repurchases were made.
I bought the stock before I checked how much the insiders paid for the shares, which was around the $135-$136 range.
Turns out, it wasn’t too far off from my purchase price of $138.
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