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I like to enquire how valuations change over time using the price/sales ratio, rather than price/earnings, because of the reduced volatility.

Google has higher margins than average today, with net margins now 28% versus 22% average since since 2010.

With great margins (for now), looking at the forward PE ratio of 16x makes Google look really cheap. This is a company that grew sales at 21% per year over the last 14 years, and grew earnings obviously faster than that given the rising margins. Their monopoly is well intact, and I have views about the recent AI innovations that point to a net positive for Google rather than a net negative, but that would take another long post. Google is doing everything right to incorporate AI automatically in the domain where advertising would be irrelevant. People will retain the desire for keyword such (typing and little as possible, and I'm not even talking about a whole sentence, and wanting a quick relevant answer).

But margins will revert downwards at some point. So I want to stay focused on sales.

Even looking at the P/S ratio, rather than the P/E during times of high margins, Google is still cheap today! The P/S ratio is now 5.4x and Google has only traded lower than this 12% of the time since 2010:
https://www.macrotrends.net/stocks/charts/GOOGL/al...

Times of pessimism are the best times to invest. IV will be impacted by current events, but what Google is going to earn in 2035 didn't suddenly fall by 30% over the last 2 months. The world will be different in ten years.

Advertising is still pretty primitive and has a long way to go. I can already picture how much better advertising responses can become, compared to how primitive and ineffective they are (and still generating obscene cash for Google). Google has a huge runway ahead.

- Manlobbi

Even looking at the P/S ratio, rather than the P/E during times of high margins, Google is still cheap today!

Though I agree with your bullish outlook, I do expect their net margins to drift down over time, partly because of the huge ongoing costs of the new data centres to support the more compute intensive LLM-like services. You could view that as meaning that the fair P/S ratio is declining over time, or that the logic of using (cyclically adjusted) earnings rather than sales as one's metric is becoming more compelling over time. These long term trends were always going to be true at some point--six times sales was never going to be a great rule of thumb forever. But the time may be sooner than it once looked. Their depreciation charges, which are very real expenses, are going to slow the profit giant a fair bit.

Still, even if they never grew again, one would still do fine. If earnings stayed in real terms at the estimated 2025 level forever, returns from here ($146.75 close) would still be a long run earnings yield of inflation + 6.1%/year with what I would consider absolutely minimal risk. That's not a worst case scenario (worst case is always an asteroid strike), but that's a pretty good result from a pretty bad future forecast.

Jim

Manlobbi posted: "Their monopoly is well intact, and I have views about the recent AI innovations that point to a net positive for Google rather than a net negative..."

Like this?:

Project Astra

A research prototype exploring future capabilities of a universal AI assistant

https://deepmind.google/technologies/project-astra...

Manlobbi-

Thank you for this perspective.

GOOG has been my best idea for the last year or so. Been slowly building my position and happy with where its sitting today (for the next 10+ years).


Jim-

Your 'inflation +6%' forecast is a serendipitous number for me. I've started my draw-down years and the math says I need a 30 year average of inflation +6.2% to comfortably keep me out out of the breadlines. GOOG works in my case given the risk involved.


PS. Julian, it's been a while since we've heard from you on BN. Anything compelling these days to share over on the BN board?

For the visually minded, I had posted scatterplots of P/S versus average one year, two year, and three year GOOG forward returns on the falling knives board
https://www.shrewdm.com/MB?pid=617292713

The legends in the plot are correct, but looks like I posted the links in order of 3 year CAGR, 2 year CAGR, and 1 year CAGR - the reverse of what I typed into that post.

I have a lot of GOOG.
What are people's thoughts on other companies that are starting to look good?
Posting on the Falling Knives board, or the individual board, would be appropriate but maybe you could give a heads-up here if it's in response to my question. Posting on the Falling Knives board would keep things in one place, and I suspect there will be plenty in the near future.

I generally use a blend of PE and PS when valuing Google; those higher margins aren't nothing!

As a quick reminder, they might generate $380B in revenue (TTM) by the end of the year and $8.80 in EPS (TTM), some favorite metrics of 6x and 23x would suggest a stock price in the $186 to $200 range. Some more bearish multiples (5x , 20x) would suggest $155 - $175.

Certainly the first metrics are more attractive, but even the second set are acceptable. BTW: I don't see either the Revenue or EPS targets at significant risk...

tecmo
...

 

Though I agree with your bullish outlook, I do expect their net margins to drift down over time, partly because of the huge ongoing costs of the new data centres to support the more compute intensive LLM-like services.

Hot Take: LLMs will follow an S-Curve; which is fine they will be "good enough" for many, while the cost to generate the models will fall dramatically.

tecmo
...

What are people's thoughts on other companies that are starting to look good?
Posting on the Falling Knives board, or the individual board, would be appropriate but maybe you could give a heads-up here if it's in response to my question. Posting on the Falling Knives board would keep things in one place, and I suspect there will be plenty in the near future.

Some ideas

* SPY at $420
* Costco at $600
* MSFT at $325 (already have a lot; unlikely to add more)
* QQQE at $60

I generally track a few companies who's business I have confidence in, and then look for attractive prices to buy (or sell); so my watch list tends to be very small.

tecmo
...

Don't forget the 2024 Nobel Prize that Google's Denis Hassibis and DeepMind shared for solving the protein structure prediction problem with AI.
Google's DeepMind is their AI fundamental research subsidiary. Isomorphic Labs was recently formed with Hassibis et al to capitalize on their AI approach that solved the protein structure prediction problem (the two subsidiaries collaborate). Isomorphic has raised money from Eli Lilly and from Novartis with focus on disease related proteins and small molecule therapeutics. A blockbuster drug generates over a $billion/year, Google can get a slice of many revenue streams if this pans out.

What are people's thoughts on other companies that are starting to look good?
Posting on the Falling Knives board, or the individual board, would be appropriate but maybe you could give a heads-up here if it's in response to my question.

There is a new board about non-US individual stocks (not ETFs or funds).
https://www.shrewdm.com/MB?bid=26
A few falling-knives type ideas have been posted there, including a pair of my recent purchases.

Jim

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