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Alphabet or Google stock climbed 11% last week after reporting Q1 earnings. The company now has a market cap of 1.48 trillion dollars. With 26 billion of cash and 14 billion of long-term debt the enterprise value is roughly 1.47 trillion.
Q1 results showed a 3% increase in revenue to 69.8 billion but there was an 8% decrease in net income.
Over the last 12 months Google has now reported 285 billion of revenue, 55.6 billion of net income and 62 billion of free cash flow. So the company is valued at 5.2 times revenue, 25 times earnings and 24 times free cash flow.
As I mentioned, Google’s earnings dropped last quarter but the stock still went up because investors were pleased with the company’s performance in Google Cloud.
Cloud is a lucrative and promising business and the 28% increase in revenue was more than recorded by Amazon’s AWS and roughly on a par with Microsoft’s Azure. Market share gains in this segment is a very positive sign.
And investors were also encouraged by the company’s progress in AI.
When OpenAI introduced ChatGPT, Alphabet stock plummeted by around 15%. But in a conference last week, Google began to take back the AI narrative when it unveiled new features for its own AI tool Bard.
Unlike ChatGPT, Bard can access images and internet links, and its training is not cut off in 2021.
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ChatGPT is still better at certain tasks but Bard is now holding its own and it’s too early to say who is actually leading the AI race. And even if users do prefer Bard, we still don’t know how Alphabet plans to monetize that product.
Let’s consider a scenario where Alphabet grows revenue at 10% per year for the next 10 years then operates with a 20% net margin which is slightly lower than its historical average. That would see the company produce 162 billion of net income in 10 years time.
Apply a 25 times multiple to that figure gets us to a market cap of 4 trillion which works out to an investment return of 10.7% per year.
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