Google at the current price is a perfect investment. It’s not going to pay off as fast as Ted Weschler’s 2020 Dillard’s bet, a one year 13 bagger, but I think it has the same characteristics that made Dillard’s a perfect investment. I say that because at the current price, Google has an understood and limited downside, while having a large and long-term upside. Heads I win, tails I don’t lose that much. It’s a no-brainer. It’s a perfect investment, and today I made it a 25% position.
It’s a very simple investment. I simply think Google is a wonderful business at a fair price. It might even be a cheap price. I clearly understand my downside, it’s limited, and I think the upside is huge. Let’s drill down.
Circle of competence – Google is in the dead center of my circle of competence.
The business – Based on past business results, and on my understanding of the business and the industry, I think it is extremely likely that Google continues to grow revenues and profits and earns a lot more money five, ten, and twenty years from now. They’re dominant in search, they have a massive advertising business that keeps getting better, YouTube has 2 billion users and is great, cloud is growing at 40% and has a huge runway, and Waymo is a lottery ticket that we get for free. Google is a wonderful business that is getting stronger. They have a durable, competitive advantage.
The balance sheet – $15 billion of debt, $134 billion of cash.
Management – The CEO is running Google perfectly, and you cannot say enough about the CFO. I compared her to Michael Jordan in my last tea time.
Price – This is where the investment gets interesting and what makes it a perfect investment. Google is cheap. Let’s explore why.
An interesting thing happened with Google. Their stock was already down 15% from a recent high and then they reported Q1 earnings and the market did not like the amount of growth that Google reported at YouTube. So the stock dropped another 5% and Mr. Market just served it up on a platter for me. Thank you Mr. Market.
I saw an article about the quarter. I said, “So what? YouTube is only 10% of revenue and is in fine shape, I’m going to check the price.” I checked the price, I was surprised by what I saw, and I bought. So simple.
Google’s market cap is $1.54 trillion. The enterprise value (my true cost if I bought the entire company) is $1.42 trillion. Last year they earned $76 billion and this year they’re expected to earn around the same. But next year they’re expected to earn around $100 billion. So I paid an EV to price of 18 on last year and this year’s earnings. But on next year’s earnings the EV to price is 14. I don’t think Google is going to be trading for a price of 14 times earnings over the long term. I think a more accurate number will be 20 to 25 times earnings.
If they earn $100 billion and trade for 20 times earnings, the business will sell for $2 trillion. If they trade for 25 times earnings, the business will sell for $2.5 trillion. At the end of 2023, if they sell for $2 trillion, I’ll have made a 25% compound return, and if they sell for 25 times earnings, I’ll have made a 46% return.
But I’m not interested in holding Google for one year. I’m planning on holding Google forever.
Some estimates have them earning near $150 billion a year just a few years out from now. $150 billion at 20 times earnings is $3 trillion. That’s a double. Who knows? They could even go for 30 times earnings, $4.5 trillion, a triple.
What will Google earn five years from now? Specifically, I have no idea, but generally and directionally, I am confident that it will be a whole lot more than right now. And as I said, I’m not thinking about the next five years, I’m thinking about the next fifty. Google is a wonderful business, the upside will take care of itself. It’s the downside that one should worry about.
And with Google, at this price, the downside is understood and limited. Google is going to keep growing. And if Google keeps growing, it is not going to sell for 10 times earnings. Or even 15 times earnings. There’s no way, over the long run, that Google will trade for 15 times earnings. It’s just too strong of a business, and it’s growing too fast to have a multiple of 15 over the long run.
So I’m saying 15 is the floor. 15 times $76 billion is $1.14 trillion, 80% of my purchase price. The most I can get hurt is a 20% downside. But if Google does earn its expected $100 billion in 2023 and keeps growing from there, the floor is $1.5 trillion and my floor is actually above my purchase price of $1.42 trillion.
Heads I win, and keep winning for decades (it’s a compounder), which means I’m winning a lot, and tails I don’t lose much, if anything at all. It’s a perfect investment.
The only real risk I foresee is a short-term, limited risk. If we have a bad recession, advertisers will spend less money on Google. But that’s okay, and it’ll happen a few times over my forever holding period. Google could last three years with no revenue just on the cash they have in the bank (cash divided by administrative expenses). And of course they’re never going to have no revenue. My point is that whatever happens with the macro economy, Google will survive. Sales and earning might go down, be flat, or be less than expected if we have a bad recession in the next five years, but who cares? They will survive that period, they will only grow stronger in the interim, and their durable, competitive advantage will be there when the recession ends.
My investment in Google is not complicated or difficult. It’s easy and a no-brainer. I sat around for months, reading, studying, and trying to become a better and wiser person. And then I looked up one day and saw that Mr. Market had served me a big, fat pitch right down the middle of the plate. I saw the pitch floating there, I loaded up, and I hit it out of the park.
My investment in Google is inspired by Warren Buffett. I find this interview to be the exact way that I’m thinking about this investment. What a teacher. Thank you Warren Buffet!