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A Question Most Tech Investors Don’t Think To Ask
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If you’re going to buy a tech stock, Google (GOOG) is hard to beat.
It’s not terribly expensive, at around 25x earnings. It has incredible prospects: its cars are driving themselves around San Francisco. It dominates the high-margin business of online advertising with its famous Google search engine. It has an enormous user base with its ubiquitous Gmail platform. And then there’s YouTube, which seems to be quietly winning the streaming wars.
Google is one of the most powerful tech companies in the world, and probably the biggest winner of the internet revolution that began in the late 1990s. But… is it a good business?
Its earnings just came out, so we have lots of timely and relevant data to consider.
When I judge the quality of any business, I’m primarily looking for return on equity (“ROE”): I want to see how much money the businesses managers can produce with their assets, because – assuming share count remains the same – that’s the rate at which the business is likely to compound over time. There are different ways to generate ROE (profit margin, asset-turns, and leverage). So, my next question is, how profitable is the business… and, then, finally, how much growth is there.
(These questions all assume that the company’s balance sheet is stable, that its products or services are widely embraced, etc.)
Last year, Google produced an enormous amount of revenue – up 14% over last year to $350 billion! That makes it one of the largest businesses in the history of capitalism. And, the company’s accountants claim (more about this below) that the firm ended the year with after-tax profits of $100 billion. Again, that makes it one of the most profitable businesses in the history of capitalism.
A few other figures we need to know. Google has total assets of $450 billion and total debts of $125 billion, giving it a net asset value of $325 billion.