Alpha-betting

Published on 08/04/22 | Saurav Sen | 4,272 Words

The BuyGist:

  • We got interested in Google the minute the stock split. It made the share price accessible to many of our subscribers.
  • We make a definitive call on what the business will look like in 5 years. Then we decide on whether to invest (or not) accordingly.
  • This thesis (and all our other theses) connects qualitative factors about the company's business to specific effects on each important cash flow variable - from Revenue down to Operating Costs, and all the way to Free Cash Flow.
  • This investment thesis is for subscribers only. However, below you can see a preview of the thesis - what our subscribers get.
  • The thesis estimates "what we need to believe" to buy or hold the stock for a decent return, followed by a decision on whether to buy, hold, pass, or sell.
  • That decision depends on the "soft" stuff that matters - competitive advantage, economic moat, management strategy etc.  Ultimately, it's a qualitative decision.
  • Subscribers have full access to the investment thesis and our decision.

Table of Contents & Ground Rules

The point of this investment thesis is to have clarity on whether to invest in Google, and why. Too many people “invest” by just punting based on spurious factors such as recent price movements, superficial valuation multiples, or hearsay from talking heads in media. Ultimately, it’s about decomposing the stock price into EXPECTATIONS that are baked in, and then answering the question “are these baked-in-expectations too optimistic or too pessimistic?”

Digging in – to the expectations that are baked into stock prices – takes time and effort. Most people don’t have the time or patience for this. Totally understandable. But we love it!

Let us do the heavy lifting, so you don’t have to.

Here are the contents of the investment thesis:

  1. Thesis Summary
  2. Latest Earnings Report
  3. What needs to happen?
  4. Comfortable Business?
    • Competitive Advantage & Moat
    • Management Strategy & Growth Drivers
    • Key Risk
    • Financial Model Risk
  5. Rational Exuberance: Revenue Growth
  6. Sanity Check: Gross Margin
  7. Sanity Check: Fixed Costs
  8. Sanity Check: EBITDA Margin
  9. Cash Flow Summary
  10. Cash Flow Details
  11. Cash Flow Notes

Ground Rules:

  1. Our minimum return requirement is: cumulative return of 50% in less than 5 years.
  2. Based on this return requirement, we ask ourselves, “What do we need to believe about the fundamentals of the business to achieve that?”
  3. Then we answer the more important question: "how easily can we believe it?"
  4. In this thesis, we use “Google” and “Alphabet” interchangeably.

Before we dig in, here’s a free snippet from one of the sections below. We believe that if this scenario comes to pass (or if the market believes it will), there is significant upside in Google’s stock. But the question is: Do you believe this is possible? Probable?


Please Log In or Subscribe to read the full article. Thank you.

We use cookies on this site to ensure the best service possible.