Subject: Re: Earnings Preview
Anyway, here is a possible future table, starting from today with the GOOGL price at about $122 and CPI at 305.11...

I just thought I'd follow up on my post from three years ago about a way to model plausible futures for the business.
The conservative forecast for 2026 three years ago was, in 2023 dollars,
Real 2026 sales $37.50, pre-tax margin 25%, pre-tax profit $9.37, tax rate 16.1%, and net profit $7.86. P/E on a slow decline, pencilled in as 23.2 for 2026.
CPI is up 9.84% since then, so in today's dollars that old forecast would be:
Real 2026 sales $41.19, pre-tax margin 25%, pre-tax profit $10.30, tax rate 16.1%, and net profit $8.64. At the 23.2 multiple, implied market price in 2026 dollars $200.

How good was that guess?
Current estimates for 2026 revenue per share are around $39.25, which is pretty close to the $41.19 prediction. That's the one part that seems to have come out well.
Tax rate is looking like about 17%, pretty close to the 16.1% previously estimated. Also not bad.

But then things go off the rails. The EPS figure is expected to come in around $11.65, not $8.64. That's 35% higher.
Why the big pleasant surprise? Pre-tax margins have really soared. Rather than the expected 25%, it's running around 36%. A whole lot more of each dollar of revenue has been turning into gross profit. Recently, anyway.

And of course the old table also had a very conservative glide path of multiples. I usually assume every firm's growth rate and valuation multiple will be "ordinary" a decade after my forecast, but there is no sign of that here yet. Hence my old estimate of market price in 2026 of around $200 (23.2 times the corresponding 2026 EPS estimate in 2026 dollars) is wildly conservative relative to today's actual price of $345 (29.6 times the much higher 2026 EPS estimate). A higher multiple isn't surprising in light of a higher growth rate.

So, it wasn't a good forecast of where the price would be. However I still think it's a good way to think about the future of a firm to decide whether or not it's a buy: If you plug in the assumptions that *you* think are plausible but not optimistic, and it doesn't give a decent 5-10 year rate of return starting from the current price, the stock is probably not a sensible buy at that moment.

For Alphabet, one thing to ponder is whether pre-tax margins will fall when those very real and very large depreciation charges really start kicking in. Maybe revenue growth will pick up more than enough.

Jim