Alphabet Inc - Ordinary Shares - Class A

Fundamentals

##Symbol##GOOGL

Google stock is stuck. In fact, it's down about 1% in the last year, although it is up nicely over the last six-months. A narrative has been forming that Google as a core equity holding is dead -- a narrative which in many ways is flawed. Google's earnings and cash from operations are at all-time highs while R&D and SG&A are near all-time highs. In 2006, Apple and Google were spending about the same amount on R&D. By 2008, Google was spending about $1 billion more annually than Apple. As of today, Google spends about $4 billion more in R&D than Apple. GOOGL spends more on R&D than almost every company in all of North America in any sector.



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There's a lot going on with Google which I'll discuss in some detail below, but on a high level Android Wear, Android Pay, Android Auto (a self-driving car), Virtual Reality, a new Tablet called Project Tango and Google Photos are on the way.

The last earnings report revealed some changes that are quite promising which is why the stock rose on an earnings result that by all surface accounts looked like a flop. While revenue grew 12%, wall St. expected 13.5% growth. But, when adjusted for currency fluctuations, revenue actually grew 17%, which is astonishingly high for a company of this size. Google's aggregate cost-per-clicks fell 7% year-over-year, while consensus had only expected a 1.9% decline. But, on the earnings Google management reported that if it were not for the Youtube "skippable" ads, cost-per-click not only would have beat estimates, but in fact would have risen (remember the consensus was for a decline). We saw in the earnings report that Google was finally controlling expenses and managing profit margins; things that many analysts had been clamouring for.



We did also see that advertising revenue (which accounted for $15.5 billion of $17.3 billion total revenue) has been pressured as more people access the web on mobiles devices, where ad rates are generally lower. But in the final analysis, we saw that Google was in fact growing rather rapidly for a firm of its size, and has quite a few other products coming to market.

Google entered the operating system fray very late with two mega players (MSFT and AAPL) already in there, but Andoid now boasts 80% of the mobile market. Oddly, that incredible narrative is rarely discussed. However, Google has lost some of its control over the market, as many new players have created their own flavors of Android which are totally out of the control of Google. That brings a new vulnerability which MSFT is taking advantage of in a very clever and flexible way.

Google search is the money maker with over 4 million searches per minute. Further, there are 72 hours of YouTube videos uploaded a minute. With massive R&D expenditures comes expectations of another large success if not another truly fantastic addition to the vernacular of technology. Revenue (on an annul basis) has hit a bit of a peak (for now) and operating margin is slipping a little. Earnings and cash from operations growth will be difficult to achieve if revenue doesn’t get back on an upswing. That revenue upswing, in part, relies on the successful capitalization of R&D.

Technicals   |   Support: 540.04   |   Resistance: 598.42   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

GOOGL has a four bull (top rated) technical rating because, while it is trading above its 10-, 50- and 200- day moving averages and the stock is up on the day, the 10-day MA is now below the 50-day MA.

The consensus estimates for next quarter for revenue is $17.75B and EPS of $6.75. If the company breaks $18 billion, that would be a pretty big beat and if the firm breaks anywhere near $7 EPS, that too would be a pretty big beat.


Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	67,839	57,988	52,481	RISING
Operating Margin (QTR)	1.347	1.36	1.41	FALLING
Net Income (TTM US$ Millions)	14,578	13,026	11,193	RISING
Levered Free Cash Flow (TTM US$ Millions)	10,292	7,193	9,604	RISING
Research and Development (US$ Millions)	2,753	2,126	1,617	RISING
Research and Development Expense/Revenue	0.160	0.138		RISING

Stock Returns and Chart

GOOGL is up +4.3% over the last three months and up +14.3% over the last six months. The stock has returned -1.3% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom). We can see a rather long period of stagnation.
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Now let's examine the visualizations of the critical financial measures.

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	67,839	57,988	52,481	RISING

Revenue over the trailing twelve months (TTM) for GOOGL is rising, up 17.0% year-over-year and 29% over two-years. Keep in mind, this is a company that generates nearly $70 billion a year in sales, so a 17% growth rate is rather strong. In fact, in the trailing-twelve-months, GOOGL is now at its second highest level ever for revenue. While advertising takes the cake in terms of the dominant force at over 80% of revenue, other initiatives are developing including Google Photos, which is the photo portion of Google Plus. While Google Plus is being dismantled, Google may have accidentally stumbled across a nice competitive product for Facebook's (FB) Instagram. Keep an eye on that.

Further, the company is moving into Android Wear, Android Pay, Android Auto (a self-driving car), Virtual Reality (to compete with Facebook's (FB) Oculus one presumes), a new Tablet called Project Tango amongst other things (yes, there is more). Listen for updates on all or any of these projects; Google needs a good kick in the a** and any kind of good news surrounding these products could be the boost it needs (good news means progress, not necessarily revenue). Of course, first and foremost, it's ads, click rates and click rate growth.

What do all these numbers mean?
GOOGL's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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Another cool way to look at revenue is to examine revenue per employee. Below we have charted all technology firms with mrket caps above $40 billion, equal spaced them (ranked) on the x-axis and plotted revenue per employee in $million on the y-axis.


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If Google keeps focusing on cost cutting and margins, this number might actually rise. If we exclude AAPL (which is on a different planet), Google is going head-to-head with FB.

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Net Income (TTM US$ Millions)	14,578	13,026	11,193	RISING

Net Income (after tax profit) over the trailing twelve months (TTM) for GOOGL is up nearly 12% year-over-year and now stands at an all-time high of nearly $14.6 billion. Let's not lose sight that Google is growing revenue and has seen earnings hit all-time highs. The company is growing and the "death" narrative is weak at best.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars.


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Research and Development (US$ Millions)	2,753	2,126		RISING

Research and Development (US$ Millions) in the most recent quarter for GOOGL was $2.7 billion, up a remarkable 29% from last year's value of $2.1 billion. We saw at the top of this post how much Google spends in R&D relative to every other company in North America. R&D does have a tendency to include stock based compensation for some ridiculous reason, but in any case, we can see the firm is working hard at innovating.

R&D per dollar of revenue for the latest quarter is $0.160. Last year this measure was $0.14 (it's rising).

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars.


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Summary
The bullish thesis for Google reads like this:

Google revenue is growing at an impressive rate given its size, the firm's strong cost controls are coming into effect creating very high revenue per employee comps while net income (earnings) are at all-time highs. With the dismantling of Google Plus, it may have stumbled upon a competitive product against Instagram and maybe the company's first success in the social media realm. The company has a number of other products in development ranging from payment methods to virtual reality, tablets and even a self-driving car. It appears that the advertising space (which is the lion's share of revenue) is actually growing for Google when we look carefully at the numbers and avoid jumping to conclusions based on headline numbers. The company will beat estimates and the stock will likely rise if cost-per-click increases (as it did last quarter excluding Youtube) and growth mainatains its trajectory.

The bearish thesis for Google reads like this:

Google stock has been stuck for over a year as it can't seem to move the needle on revenue generating products that aren't advertising. It now faces strong and sizeable competition from Facebook which excels in the mobile space, the obvious evolution for on-line advertising. This space sees lower ad revenue per click / impression and is dominated by Facebook. While Google spends monumental amounts on R&D, we're really yet to see the fruits of that labor and while we can trust and believe in a wonderful management team, at some point we do have to see fruits from that labor or it's just a margin killer with no upside.

Both theses are compelling and thoughtful. It may simply come down to a single question: Do you believe in Google's management team, or not? My answer is yes, but my answer is only for me.