The market says Google’s parent company Alphabet Inc. is worth $ 1 trillion, but investors who have tried know that it is extremely difficult to make a sustainable assessment for this company.
Alphabet is a confusing company – even if you find out that the $ 1 trillion market cap it exceeded for the first time at Thursday's market close is an adventure. The value of three share classes is added up: Class A
Acol, + 0.76%
voting shares originally sold by Google as part of the IPO; Class B, regulatory shares 84% owned by co-founders Larry Page and Sergey Brin; and class C
phonetic + 0.87%.
non-voting capital created by Google so that Page and Brin can keep control of the company they create.
The labyrinth does not end at the warehouse structure. Basically, Alphabet is Google, an internet advertising giant. But for years, Page and Brin expanded far beyond their core search ad business into other growth businesses without providing much up-to-date data.
Even Google's best-known company outside of its core search engine, YouTube, has never received a detailed financial metric, even after the U.S. regulators requested it. YouTube, with more than 2 billion monthly users and one of the most popular Internet websites in the world, is bundled with all other Google advertising revenue, which accounts for approximately 84% of the company's total revenue.
The rest of Google’s revenue comes from three companies: Google Cloud’s cloud computing offering, Google Play’s app business, and Nest’s hardware business. These are obviously three key areas of business for an investor as the company tries to compete with other technology giants, Amazon.com Inc.
AMZN, + 0.85%
and Microsoft Corp.
MSFT, + 1.83%
in cloud computing and trillion dollar club pioneer Apple Inc.
AAPL, + 1.25%
in mobile apps and hardware.
However, Google has never broken down revenue from these three businesses, just summarizing it, with the exception of twice mentioning a quarterly milestone in Google Cloud – when the company first grossed $ 1 billion in February 2018 and a quarterly high of $ 2 billion in October 2019 -Dollar exceeded.
See also: Google Cloud has managed to bump Amazon, Microsoft
Then there is Alphabet, the umbrella organization influenced by Berkshire Hathaway, which also includes "Other Bets", the futuristic games of chance led by Brin until the co-founders of Google decided at the end of last year to say goodbye to day-to-day management. Other bets generate revenue from companies like Fiber and Verily, but also have massive losses – losses of $ 941 million to revenues of $ 155 million last quarter.
However, each of these companies could be worth a lot of money if it achieved its typically futuristic and difficult goals. The Waymo driverless car business, for example, is generally seen as a leader in the race for autonomous vehicle technology, but it is not yet clear when this might pay off, and the majority of Other Bets' losses are conceivably generated by Waymo.
All of these various factors and unknown factors work together to create a $ 1 trillion worth 31.2 times Google’s 2020 earnings. Compared to the other two technology giants with a 13-digit market cap, this is a higher P / E than Apple's, but roughly the same as Microsoft's.
It is hard to be sure that Alphabet stays at these levels for a long time. Should the company's core business with search engines and ads slow down again in the fourth quarter of its growth rate, investors could get back part of the profits. If one of the other missions suddenly turns out large, it can zoom higher. Investors should press Alphabet to learn more details about the financial data to make it clear that this valuation is appropriate and potentially stable.