GOOG???

Google is down over 20% since reaching an ATH of $3042 last November. The shares currently trade around 21 times ttm EPS, which seems to be a reasonable entry point historically. Some concerns I have at the sustainability of margins recently achieved. Net margins have ranged between 20-25% over the past decade but suddenly jumped to 32% last year. Profits double from $40 bil to $80 bil, increasing from $58/sh to $110/sh. Is this a sustainable change or a blip that will revert to the mean? Given the current rout in the markets, and especially in all things web, I would like to see the shares fall a little more before dipping my toes. The shares have traded as low as 15 times ttm EPS, which would give $1700 as a back of the truck screaming buy entry point. On the other hand, I’ve been waiting for GOOG to approach 20 times ttm eps since I missed the boat in March 2020. Maybe now is the time to get my feet wet?

PP

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Google is down over 20% since reaching an ATH of $3042 last November. The shares currently trade around 21 times ttm EPS, which seems to be a reasonable entry point historically. Some concerns I have at the sustainability of margins recently achieved. Net margins have ranged between 20-25% over the past decade but suddenly jumped to 32% last year. Profits double from $40 bil to $80 bil, increasing from $58/sh to $110/sh. Is this a sustainable change or a blip that will revert to the mean? Given the current rout in the markets, and especially in all things web, I would like to see the shares fall a little more before dipping my toes. The shares have traded as low as 15 times ttm EPS, which would give $1700 as a back of the truck screaming buy entry point. On the other hand, I’ve been waiting for GOOG to approach 20 times ttm eps since I missed the boat in March 2020. Maybe now is the time to get my feet wet?

As you mentioned; earnings are rising faster than sales. We know that can’t continue forever…

Historically a multiple of 6x to 8x sales has been pretty common. Buying at the low end means excellent returns, buying at the high end was merely “good”. They will report earnings next week; but we might take a guess at the current quarter and then back-calculate the TTM.

MAR 2022 : $70B - $80B??
DEC 2021 : $75B
SEP 2021 : $65B
JUN 2021 : $61B

This sets a range of $270 - $280B, multiply 270 by 6 and you get $1,626B, multiple 280 by 8 and you get $2,240B. The current price of $2398 / share → $1,690B - so definitely near the low end.

tecmo

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BTW: I would put “back up the truck” at anything close to 5x or around $2000 per share. It would be very unusual for it to trade below that amount IMO.

tecmo

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Some concerns I have at the sustainability of margins recently achieved. Net margins have ranged between 20-25% over the past decade but suddenly jumped to 32% last year.

The simplest way to allow conservatism in that direction is to look at price-to-sales ratio.
Historically an entry at 6 times sales or lower has worked out very well fairly quickly.

I think it’s at about 6.15 right now.
So that too is in the ballpark—suggesting one is unlikely to do too badly even with margin reversion.

Of course there are lots of other moving parts.
Were historical valuation levels deserved? Will they resemble the future valuation levels?

But I do like this simple test of a moat:
If I wrote you a cheque for ten (or a hundred) billion dollars, could you set up in competitoin with them successfully?
I suspect not.
Even if the competition authorities come down on them like a ton of bricks and break them up, the pieces are likely to still be making good money long after I’m gone.

Jim

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If you want just that slight extra margin of safety, there’s always cash-backed put writing.
Writing a Jan 2023 ATM $2400 put option would get you about $265 in premium.

That gets you either about 16.6%/yr rate of return on cash at risk,
—or—
an entry price of $2135, a P/S under 5.5 and P/E about 18.3.
Those outcomes both seem like things a fella could probably live with.
Not really a margin of safety, but it gets you into the zone that has historically worked out well.

Of course, each contract commits about $213k in capital.
Probably not something most of us would do by the dozens.

Jim

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Another thing to remember; you are chasing a fast moving company. So buying at $2400 today might be more “expensive” than waiting; but your actual price you pay might be higher if you wait a quarter. For example, GOOG might bring in over $90B in revenue next quarter… which would put TTM at $310B even at the low end of 6x that gets you to $1,860B in market cap.

tecmo

…each contract commits about $213k in capital.

To borrow a quote from Sam Malone, “Anyone wanna go halfsies?”

John

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To borrow a quote from Sam Malone, “Anyone wanna go halfsies?”

Is ‘tenthsies’ a word?

Pete

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an entry price of $2135, a P/S under 5.5 and P/E about 18.3.
Those outcomes both seem like things a fella could probably live with.
Not really a margin of safety, but it gets you into the zone that has historically worked out well.

I’m always looking for a margin of safety, although not always finding it. A recent example is taking a position in QRTEA. Ugh. Fortunately position sizing is its own margin of safety from a portfolio perspective.

With GOOG, I want to own it in some size, so maybe taking a small starter position now is the way to go while waiting and hoping that the market offers a better price in the coming months. We’ve seen Costco hit it out of the park and then watched the shares slip in the wake of a post earnings enthusiasm bump in share prices. I sold Costco before the earnings report and missed the run to $600, but it’s already retreated below my sell price. This market seems ready to shrug off good news in a steady march toward mean reversion.

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With GOOG, I want to own it in some size

If I may, I will sit tight with the cash. There are many companies that will survive, thrive, continue to grow. They are coming from the high valuation. They will get reasonably valued soon. I would place multiple bets like 10 to 15 such companies with 2% or 3%. In the past those small bets have often outgrown so fast they have outpaced my overall portfolio growth.

I think concentrated bets are for super investors who have ability to research, have high confidence. For small investors spreading the bets over to many names work better.

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Not about when to buy Google. But google is the primary beneficiary of paid search and click attribution (which is basically somewhat messed up by Apple’s privacy changes).

Facebook is evolving to fight that. I am not sure how much you can truly fight Apple, especially now Apple has gotten a taste of how much ad revenue they can make. In many ways, I think Google’s growth to slow. Where is the next big driver for revenue for google?

https://www.facebook.com/business/news/insights/three-large-…

Right now, Analysts are modeling $50 B incremental revenue for the next 4 years, i.e., $303, $351, $404, $466 B by 2025.

What can go wrong? How sustainable $50 B incremental revenue?

It’s cheap but it’s cheap because the growth stocks as a group sold off in general, so it’s not relatively cheaper than the market, and nobody can really time the market well.

Purchased some more GOOG today @$2388.96

tecmo

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Getting punished in AH now, presumably due to missing forecasts on earnings for the quarter ($24.62 per share versus estimates of roughly $26 per share).

Will likely be adding more, myself.

Getting punished in AH now, presumably due to missing forecasts on earnings for the quarter ($24.62 per share versus estimates of roughly $26 per share).

Will likely be adding more, myself.

I might buy a bit more as well. Took a chance buying before earnings…

tecmo

I added in the after-market. Listened to the conf call. Sounded gloomy. This will pass. Google is the epitome of “moat.” Cloud revenue is growing solidly. Lotsa smart folks there.

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More added @ $2335.19

tecmo