I’ve been thinking about Google recently… especially as concerns arose around COVID-19 and what it would do to the new era advertising giants. Everyone knows “search” is such a powerful business in advertising and benefits from the scale / platform benefits of everyone “googling” what they need. Though I can’t help but think that Google’s assets are underappreciated.
I think Google should take a page from IAC. For those of you unfamiliar with IAC, they essentially are a publicly traded venture capital firm. However, unlike VC the business is “home grown” and once it matures, they tend to spin-it out and maintain a stake or take a dividend from the business (like they have recently done with Match Group, the owner of Tinder and other dating apps).
IAC’s track record is impeccable. Recognize any of these names?
The point is, IAC understands that sometimes a company is worth more operating outside of a large corporate umbrella and with its own balance sheet, making its own strategic decisions, and having its own separate shareholders.
They also understand that a company may need to have a shareholder early on with a long-term view. I think Google’s assets could benefit from this treatment as many of them are mature at this point.
Imagine Google does the following spin-offs:
- Google Nest, Google Home – Hardware play
- Google Maps – logistics tolling play in the long run
- Waymo – Driverless Cars
- Google Cloud Business
- Android, Chromebooks, other hardware etc.
Search, YouTube, & G-suite (Google Sheets, Gmail, Google Drive, Google Pay) is the “RemainCo” as the assets really do benefit from being combined.
Do you think the assets of the company are worth more than what Google currently trades at? I do.
I think YouTube and Google probably are worth where Google trades right now.
Facebook has roughly 50% EBITDA margins on its advertising-driven business. Let’s say Google’s is in a similar ballpark. The company disclosed in 2019 that Google and YouTube generated around $135BN in revenue, so applying a 50% EBITDA margin to that implies $67.4BN in EBITDA. At the time of writing, Google’s entire Enterprise Value is $837BN, so that foots to ~12.5x EBITDA for a company that is a secular grower. That doesn’t seem excessive to me.
Next, lets look at Google Cloud, which is growing like a weed and competes with AWS.
Back when AWS was around this size in revenues, it had low 50% EBITDA margins.
Therefore, I can assume again around 50% EBITDA margins for the Google Cloud business, which foots to $4.5BN of EBITDA. This too is a secular grower, an oligopoly business between the tech giants, and likely going to double earnings in a couple years. Therefore, I do not think its is unreasonable to say this is worth $75BN (frankly, if earnings do double in 2 years, that’s only an 8-9x forward multiple).
The point is though that that one segment could add a lot of shareholder value if it operated outside of Google. We haven’t even touched “other bets” Google has, which seems to be a lot of cookey stuff like barges for some reason.
There are so many things within Google that I bet we don’t even know about. This list of acquisitions by Alphabet is insane and as a layperson, I don’t know what many of them do. Its also hard for me to actually see what value they bring to Google or to me as a shareholder — but if Google separated out its businesses, maybe that wouldn’t be the case!