First of all, Thank you so much for the write up! Great insight!
Just for learning purpose:
How do you conclude the P/E to be 25?
My thought process is: If we look at 2024 earnings it were $100B and total market cap is 2T. That's 20, isn't it?
I am not looking it 1st quarter 2025 because income is $8B extra (as you wrote) but even if we ignore that, it would still be greater than Q12024. Am I missing something?
Vishal, thank you for your question. It really depends what numbers you use for earnings. Some people take income statement net earnings at face value, some look at EBITDA, others make their own adjustments (Buffett style) and some will look at Free Cash Flow as a better measure. The income statement method will yield ~17x earnings while the FCF method will be closer to ~26x. The other methods will fall somewhere in between the two extremes.
Since an investor's returns on investment depend entirely on future earnings, and these metrics are all backward looking, they are only of limited value in any event. But if you assume that the P/E is 17x and invest on that basis, then you are concluding that the net earnings run rate from Q1 2025 is durable - which clearly it is not because it was a SpaceX paper distortion.
We all know that this company is not capitalized at a P/E of 17x, yet many retail investors using stock screeners will assume that it is because that's what the platform tells them. The take away here is that being lazy and relying on platforms to analyze a business is inherently dangerous and will invariably lead to the wrong conclusions.
Great thoughts here… I’ve been back and forth on Google for quite some time… it’s nice reading that someone else is having a very similar struggle… right now I’m of the mindset of Google will find a way, but definitely see all the paths towards irrelevance, too (at least from a Growth stock perspective 🤷♂️). Subscribed!
None of us can know. Only time will tell. I simply tried to break it all down so that each of us is better able to formulate our own opinion.
As for me, I'm not invested in Alphabet. It comes down to balancing type 1 and type 2 risks. The former is the risk of missing share price appreciation - FOMO (fear of missing out) as it is now called. The latter is about avoiding a permanent loss of capital if the economics of the business deteriorate from here - this is the type that most investors ignore and which gets them into trouble.
I always prioritize type 2 risks and for me, that is just too high at the moment with Alphabet.
Investing is about risk adjusted returns. I can't quantify the risk around Alphabet at the moment, and I believe that there are better places for me to allocate capital.
Yes that's where I am too, albeit your analysis has brought more depth to it. I can't see (literally) how this business might look with 5 more years of AI influence in its vicinity.
First of all, Thank you so much for the write up! Great insight!
Just for learning purpose:
How do you conclude the P/E to be 25?
My thought process is: If we look at 2024 earnings it were $100B and total market cap is 2T. That's 20, isn't it?
I am not looking it 1st quarter 2025 because income is $8B extra (as you wrote) but even if we ignore that, it would still be greater than Q12024. Am I missing something?
Thanks! :)
Vishal, thank you for your question. It really depends what numbers you use for earnings. Some people take income statement net earnings at face value, some look at EBITDA, others make their own adjustments (Buffett style) and some will look at Free Cash Flow as a better measure. The income statement method will yield ~17x earnings while the FCF method will be closer to ~26x. The other methods will fall somewhere in between the two extremes.
Since an investor's returns on investment depend entirely on future earnings, and these metrics are all backward looking, they are only of limited value in any event. But if you assume that the P/E is 17x and invest on that basis, then you are concluding that the net earnings run rate from Q1 2025 is durable - which clearly it is not because it was a SpaceX paper distortion.
We all know that this company is not capitalized at a P/E of 17x, yet many retail investors using stock screeners will assume that it is because that's what the platform tells them. The take away here is that being lazy and relying on platforms to analyze a business is inherently dangerous and will invariably lead to the wrong conclusions.
Thank you so much for getting back and a detailed reply! :)
I see. Yes, that makes since. I was thinking afterward that FCF method will lead to higher multiple.
Thank you so much for explaining and the great write up! :)
GOOGLE KEYNOTE 2025
As a follow up to my short piece on Alphabet, take a look at Google's I/O 2025 Keynote:
Short 10 minute highlights: https://youtu.be/LxvErFkBXPk
Full version (2 hours): https://www.youtube.com/live/o8NiE3XMPrM
The company is producing some amazing technology - that is undeniable.
Great thoughts here… I’ve been back and forth on Google for quite some time… it’s nice reading that someone else is having a very similar struggle… right now I’m of the mindset of Google will find a way, but definitely see all the paths towards irrelevance, too (at least from a Growth stock perspective 🤷♂️). Subscribed!
Brilliant analysis, thank you James!
And the answer is...?
<:)
None of us can know. Only time will tell. I simply tried to break it all down so that each of us is better able to formulate our own opinion.
As for me, I'm not invested in Alphabet. It comes down to balancing type 1 and type 2 risks. The former is the risk of missing share price appreciation - FOMO (fear of missing out) as it is now called. The latter is about avoiding a permanent loss of capital if the economics of the business deteriorate from here - this is the type that most investors ignore and which gets them into trouble.
I always prioritize type 2 risks and for me, that is just too high at the moment with Alphabet.
Investing is about risk adjusted returns. I can't quantify the risk around Alphabet at the moment, and I believe that there are better places for me to allocate capital.
I hope that helps.
Yes that's where I am too, albeit your analysis has brought more depth to it. I can't see (literally) how this business might look with 5 more years of AI influence in its vicinity.