After expanding nearly 45% from the lows in late March, at the existing value of approximately $1,500 consistent with a constant percentage, the constant percentage of the alphabet (NASDAQ: GOOG) has reached a ceiling with no more room for expansion. Google’s inventory increased from $1,057 to $1,500 since the past low. The increase in consistent percentage values was helped by the Fed’s multibillion-dollar stimulus package announced on March 23, which raised confidence in the market. The value increased more because Google’s revenue in the first quarter of 2020 exceeded market estimates. Ad revenue growth slowed, but non-advertising revenue continued to hold. Due to the blocking restrictions, the use of all the pro-consistent elements of Google, from Google search to Youtube, has been developed, which bodes well for the company. In the non-advertising segment, some products such as Google Classroom and Meet have also noticed an increase in usage, contributing to the increase in the company’s consistent percentage value.
Lately, inventory is almost double the point it had at the end of 2016 and is just below the pre-Covid peak (February 2020) of $1527. We know that the company’s inventories are now valued at a moderate price. Our dashboard “What points caused a 95% replacement in Google inventory between 2016 and now?” It contains the underlying figures.
Part of the increase in percentage value during the 2016-2019 era is justified by the 75% expansion in cash revenue. Google’s cash increased from $90 billion in 2016 to $162 billion in 2019, basically due to the expansion of ad cash in Google’s search segment. This was offset by a 2% minimisation in profitability, with a net profit margin down from 21.6% in 2016 to 21.2% in 2019.
The highest value percentage during this was as margins and income increased (and the margin decrease in 2017 was due to a singles tax charge), which led to a fixed P/U multiple of 27x in 2016 and 2019. The multiple is higher this year and currently stands at 31x. We believe that the market has been positive about Internet companies in the existing environment, which has led to their growth.
Effect of coronavirus
Following the Fed’s encouragement, which helped lay the groundwork for concern, the market was willing to “look through” the era of existing weakness and adopt a longer-term vision. As investors focus on 2021 results, valuations rather than old valuations are vital to locating value.
Thus, with a strong expansion of profits over the years, the best-expected earnings in the first quarter of 2020 despite the crisis helped Google expand its P/U multiple to 31x today. The company is expected to charge around $36 billion to make a profit in 2020 and 2021. While investor attention has changed around 2021, multiple P/E has reached an upper limit. We believe that Google’s valuation is around the existing market price.
While GoOG’s inventory costs appear to be integrated, is it possible that only investment in indebted companies, downwards but not outwards, will generate a strong after Covid? Learn more in our analysis: The Leveraged 5: AAL, CTL, COTY, OXY, HOG.
To learn more about Internet space, find out how Twitter and Snap have behaved in recent years.
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