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Hello, welcome to the investment sprint channel and today we will look at the most important segment of the holding company Alphabet Google. Google shares jumped by 5% last Monday. Based on the news that Apple wants to use Google's Gemini to deploy generative Ai for its new iPhone, the shares have added approximately another 2% to their growth since then.
If we look at the fundamentals, Google now has a market capitalization of 1.9 trillion US dollars, 24 billion in cash, 118 billion in investments and 13 billion in debt. This means that the company's Enterprise value is around 1.8 trillion US dollars, which currently ranks Google in a beautiful sixth place in the ranking of the largest companies according to Market Capitalization.
Google is a reliable company. With relatively stable sales growth, they reached 307 billion dollars in 2023. Net profit was almost 74 billion. The Price to Earnings Ratio indicator shows that Google's shares are valued relatively highly. And at 26 times the market EPS or earnings per share, it is based on $5.85 The rumored Apple- Google merger mentioned at the beginning of the video wouldn't be the first time the original iPhone used Google Maps and Google paid Apple $18 billion a year to be the default search engine in the Safari browser.
Apple has been quiet about the potential use of Google's AI, but if it were to come out, Gemini AI could be deployed on more than 2 billion devices, according to the New York Times. Gemini would essentially jump over the GPT chat overnight. In terms of user numbers, that means Apple has to be more than confident that Google's AI model is good enough.
Google's initial AI launch in February didn't go according to plan, and Yemen was accused of producing racially biased images, resulting in the company having to disable the feature. More broadly, some investors worry that AI could erode Google's main source of revenue. The risk is that generative AI will create better alternatives to text-based search.
That could be a problem for Google, as 57% of the company's revenue is still derived from search-based ads. On the other hand, there is n't much yet. There is a lot of evidence that users would move away from Google search because its sales are still growing continuously and Google has many other ways to generate profit.
YouTube or Google Cloud are huge businesses that have many users. Another company belonging to the Google family is VMU, which deals with self-driving cars and certainly has great potential. In addition, a relatively large amount of free funds allows the company to regularly buyback an enormous amount of shares.
Let's try to specifically calculate the possible return on investment. If we assume that Google's sales were to grow by 5% per year for the next 5 years with the same net margin as today, around 24%, the company would produce 94 billion in net profit in 5 years. If we use 25 times, which is currently approximately the PE Ratio, we get a valuation of approximately 2.35 trillion US dollars more.
If the company buys back approximately 3% of its shares annually, then the return on investment would be 8% per year. However, if we left everything else the same and considered 10% growth instead of 5%, which I don't think would be unrealistic. The annual return on investment would jump to 13% in conjunction with this, it is worth noting that Google already has nine products that have more than a billion users, which offers a lot of opportunities for growth in sales and revenue.
This means that Google shares can certainly move higher and even at today's prices, I would not be too afraid to jump into the company. However, this is certainly only my personal opinion and is not financial advice. I own several Google shares, both individually and in ETFs in which Google is a part.
For more quick analysis and market news, check out my other videos on this channel that can help you on your investment journey for a better future. The name Michael tells you something, and by now most of you will probably know him from the movie The Big Short, which was based on him. This movie tells the story of a group of investors who bet against the US housing market before the financial crisis in 2008 and showed it at a time when everyone thought it would go up.
Barry still invests today and leads Scion asset management in the fourth quarter of 2023. This company announced two acquisitions that may surprise its value investing supporters Amazon and Alphabet, or Google, these stocks are usually avoided by value investors due to their high valuations, so why did Barry open a position in Google?
A bet on Google is not as expensive compared to, for example, Amazon. But during 2023, the company faced several negative narratives. At the beginning of 2023, Google traded at a PE ratio of around 18, most likely due to investor concerns that it was losing the artificial intelligence race to newcomers such as Open AI.
As we said today, this is already changing dramatically, and so Michael Barry and other investors, like me, expect Google to maintain its overwhelming share of the digital advertising market and continue to increase its revenues. Let's learn from big investors, but don't copy them. It's a hundred times better to build a portfolio of stocks that YOU believe in and not stocks that others believe in. Thank you very much for watching and have a great time.
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