Alphabet (NASDAQ: GOOGL); the company formerly known as Google, is the easiest organization in the world to take for granted. All the company does is grow and make more money in the process.
Alphabet (NASDAQ: GOOG) is now so profitable; and so successful, that it has become very boring. Every quarter the company turns in a great earnings report – that looks much like the last one. Despite this redundancy, Google’s financial numbers are well worth reading. It is possible to learn a lot from those numbers because they are so good.
The most important lesson I picked up from Alphabet’s numbers; is that there could be no limits to the growth of its core business: online advertising. Alphabet’s revenue keeps growing and growing and growing.
There could be No Limits to Google’s Revenue Growth
The company added $3 billion in revenue during first quarter 2016 and $10.15 billion in the 12 months that ended on March 31, 2016. Alphabet’s revenue was $74.99 billion at the end of fourth quarter 2015; and $77.99 billion at the end of first quarter 2016. A year ago, Alphabet reported $67.84 billion in revenues.
This indicates that there could be no limits to Alphabet’s revenue growth. One reason for this could be the slow death of the old media in the United States and other developed nations. Another explanation might be the growing amount of advertising reaching the developing world through social media solutions such as WhatsApp.
Alphabet is generating vast amounts of cash
What is even more incredible; and of far more interest to value investors like myself, is Alphabet’s astounding ability to generate vast amounts of cash. The financial numbers prove that the company’s 23.75 earnings per share number and 20.77% profit margin are for real.
Alphabet reported a net income of $17.04 billion on March 31, 2016. That net income grew by $690 million during the first quarter 2016, and $2.76 billion during the year before that. For the record; Alphabet’s net income was $16.35 billion on December 31, 2015 and $14.28 billion on March 31, 2015.
The earnings report also indicates that Alphabet has a lot of float. It reported a free cash flow of $5.23 billion on March 31, 2016, – the highest number yet. That free cash flow increased from $4.315 billion in December 2015 and $3.795 billion in March 2015. Alphabet’s free cash flow increased by $1.44 billion over the past year and $915 million over the past quarter.
Even more astounding is Alphabet’s cash from operations; at the end of first quarter 2016 that number stood at $26.96 billion. That marked an increase of $940 million over fourth quarter 2015 when the number was $26.02 billion and $2.25 billion over first quarter 2015 when the number was $24.71 billion.
Alphabet has More Cash than Berkshire Hathaway
Then there’s Alphabet’s cash and short-term investments which exceeds those of Berkshire Hathaway (NYSE: BRK.H). Alphabet had $75.26 billion in the bank on March 31, 2016; an increase of $2.19 billion over December 2015 when the number was $73.07 billion. What’s even more incredible is that Alphabet’s bank account grew by nearly $10 billion; $9.82 billion to be exact, over the past year. The company had $65.44 billion in the bank at the end of March 2015 according to ycharts data.
Among other things this means that Alphabet now has $3.53 billion more in the bank than Berkshire Hathaway (NYSE: BRK.A). Warren Buffett’s little holding company had $71.37 billion in cash and short-term investments on December 31, 2015, according to ycharts.
This means that Sergei Brin and Larry Page could pay off all of Alphabet’s liabilities (which were $26.18 billion on March 31), and still have $49.08 billion in the bank. They could also buy CBS (NYSE: CBS.A); which arrogantly claims to be the most-watched American TV network, and still have around $47 billion in the bank. CBS had a market capitalization of $27.9 billion on May 6, 2016.
The power and money that Brin and Page have accumulated with their simple search engine is staggering. Naturally, people will wonder what’s next for Alphabet.
A Few Predictions for Alphabet over the Next year
Based on these numbers I will make a few predictions for Alphabet over the next year. My projections include:
- Alphabet’s revenue will exceed $80 billion at the end of second quarter 2016 in June.
- Alphabet’s revenue will exceed $85 billion and approach $90 billion by second quarter 2017.
- Alphabet could have $85 billion in cash and short-term investments by second quarter 2017.
- Alphabet’s net income will exceed $20 billion by Fall 2016 and approach $25 billion sometime next year.
- Alphabet’s free cash flow could approach $10 billion sometime in 2017.
- Alphabet’s cash from operations will exceed $30 billion by the end of 2016.
- The pressure on Larry Page to start issuing a dividend will grow tremendously.
- Alphabet will not issue a dividend; like Warren Buffet Page and Brin hate dividends, so do not expect one while they’re in the Googleplex. There is also no logical reason, for the two to issue a dividend; the company is doing great without one.
Alphabet’s Share Price is justified
Unlike those of Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN); Alphabet’s share price is realistic. The company is worth the $725.18 a share that Mr. Market was charging for it on March 6, 2016. My take is that Alphabet could be worth quite a bit more, because of its proven ability to generate fantastic amounts of cash and revenue.
Alphabet’s proven business model makes it a 21st widows and orphans stock. If you want a safe investment that will keep growing and providing for your family; the company formerly known as Google certainly fits the bill. All apologies to Prince fans for that clichéd remark.