cafeconomics

(Acknowledgements and Inspiration: Prof. Damodaran ) Alphabet is among the most followed companies on the Wall Street. A Discounted Cash Flow valuation of Alphabet has been presented below. Free Cash Flow to Firm (FCFF) model has been used to arrive at the value per share and Capital Asset Pricing Model (CAPM) has been used to determine the cost of capital. Alphabet DCF Valuation FCFF Model Please click on the hyperlink above to open the model in a new window. Users can feel free to change their assumptions of growth, margins,taxes etc. Key Drivers of Value and Assumptions 1. Revenues: As of YE 2019 Alphabet's revenues stand at $ 161.86 billions. That is greater than GDP of Ukraine ($ 150 b), Kuwait ($ 137.59 b) and Morocco ($119.04 b). Advertising revenues account for close to 84% of total revenues $ 135.14 billions which is around 40% of the total global digital advertising spend and 24% of total ad spend (both digital and non digital). (cnbc.com/e-marketer.com) Google is the m...

Consider a portfolio of two stocks - Stock A and Stock B. Stock A gives a return of 25% and Stock B gives a return of 15%. Stock A has weight-age of 60% and Stock B has a weight-age of 40%. The correlation between these two stocks is -0.50! The only problem is that it is difficult to find such stocks in real life with high negative correlations to balance your equity portfolio returns. The chart below shows the correlation between the BSE Sensex and various BSE Indices since their inception. The chart below shows the correlation between BSE Sensex and sectoral indices for the last five years. The correlation number has been computed using month on month change since Mar 2015. While banks, financial institutions, manufacturing, industrials exhibit a high degree of correlation with the benchmark, healthcare, telecom and IT exhibit the least correlation. Not one sector is negatively correlated to the broad market index.   Let us examine the inter-sectoral correlations using month...

(Based on Prof. Damodaran's blog post: A Viral Market Update III ) Global equity markets are reeling under the pressure of Covid-19 as shown in the chart below.  Most of the benchmark bond yields dipped to record lows and recovered only after governments announced monetary measures to boost liquidity. At the risk of sounding mercenary, the moot question on everyone's mind is the extent of Covid-19's impact on the global economy. One possible indicator could be the US S&P 500 corporate earnings. Given below is the list of top -5 one year earnings decline in US S & P 500 corporate history since 1960. This can perhaps, give us a range (15% to 40%) of percentage decline in the economic activity across the globe. The silver lining is that each time earnings declined they bounced back strongly in the subsequent years as shown in the chart below. Like always, let us hope and pray that the global economy comes back stronger and better after Covid-19!

Global markets are reeling under the impact of Covid-19 and Indian markets are not an exception. Between Jan 2020 and today (14: 30 hrs of 12-03-2020) NSE Indian Vix which measures the volatility of stock markets based on option prices has gone up by a whopping 220.85%. Between Jan 2020 and today (14: 30 hrs of 12-03-2020) the broad based Nifty 50 has fallen by 20.05%. PSU Banks, Metals, PSEs, Energy are among the worst losers whereas Consumption, MNC, Pharma, IT and FMCG have shown some resilience. One would expect large cap stocks to perform better than the mid cap and small cap but that is not the case. Nifty 50, Nifty Midcap 50 and Small Cap 50 all three indices lost close to 20%. There is no where to hide at the moment. But every dark cloud has a silver lining. Many companies with good fundamentals are trading at attractive prices. Systematic periodic investments (averaging prices) with a holding period of at least two years can fetch good returns!

 This article examines the correlation between BSE Sensex and S & P 500. If we look at the chart below, there is a definite pattern which is more acute post 2008. S & P 500 can be viewed as a proxy for global cues. In the figure below, BSE Sensex year on year change has been regressed against S & P 500 and the beta of the regression is 1.0136 with r-squared of 0.25. Although the r-squared is low, the responsiveness of Sensex to S & P 500 is close 1. If we look at the correlation between the year on year changes in these two indices we have the following results. So it is safe to conclude that Indian investors do look for global cues and the degree of correlation has in fact increased in the past five years.

ALPHABET: DIVERSIFYING ITS PRODUCT PORTFOLIO Slowly but surely, Alphabet is reducing its dependence on advertising revenues. Between 2014 and 2019, the proportion of advertising revenues out of total revenues has decreased from 89.87% to 83.29%. On average, Alphabet invests around 15 to 16% of its revenues on research and development every year.  As advertising revenues stabilize (from the developed economies), Alphabet is constantly on the lookout for new sources of revenues. The race to the two trillion dollar-market cap is on (!) and the US tech giants are on the prowl with war chests of cash.   TRAFFIC ACQUISITION COSTS (TAC) TAC represents the amounts paid to Google Network Members primarily for ads displayed on their properties and amounts paid to Google distribution partners who make available Google search access points and services. Google distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers. ...