Alphabet:Key Financial Ratios 2020


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. (Annual Report 2019)


Google's TAC have increased by about 1% in the past five years from 21.28% to 22.33% as a share of revenues.

GOOGLE ADVERTISING MONETIZATION METRICS


Paid clicks for Google properties represent engagement by users and include clicks on advertisements by end-users related to searches on Google.com and other owned and operated properties including Gmail, Google Maps, and Google Play; and viewed YouTube engagement ads (certain YouTube ad formats are not included in Google click or impression based metrics). 

Impressions for Google Network Members' properties include impressions displayed to users served on Google Network Members' properties participating primarily in Ad Mob, AdSense and Google Ad Manager.


Cost-per-click is defined as Google's click-driven revenues divided by total number of paid clicks and represents the average amount Google charges advertisers for each engagement by users.


Cost-per-impression is defined as Google's impression-based and click-based revenues divided by total number of impressions and represents the average amount Google charges advertisers for each impression displayed to users.


The % change in the paids click is increasing at a decreasing rate and cost per click change % has been decreasing in the past four years. As the number of paid clicks increase the cost per click is expected to reduce as ad revenues stabilize.
The % change in impressions which is being reported from YE 2017 has increased by 9% for the year ending in Dec 2019. The cost per impression has increased by 1% for the year ending in Dec 2019.



ALPHABET: MARGINS and PROFITABILITY RATIOS


1. Gross Profit Margin = Gross Profit/Total Revenues
2. Operating Margin = EBIT/Total Revenues
3. Net Profit Margin = Net Profit/Total Revenues
4. Return on Invested Capital = EBIT*(1-t)/(Book Value of Debt + Book Value of Equity - Goodwill- Cash*) Goodwill has been excluded from invested capital.
Here for the purpose of Cash*, cash, cash equivalents and short term investments have been included.
5. Return on Equity = (Net Income-Interest Income)/(Equity - Goodwill - Cash*)
Here again for the purpose of Cash*, cash, cash equivalents and short term investments have been included. Goodwill has been excluded from equity)

Although, Alphabet's gross margins (55.58% in 2019) are on the rise, we can see that the operating and net profit margins are around 21% by year end 2019. Alphabet invests heavily in R & D and the operating margins on the new segments of revenues are much lower when compared to advertising revenues.Within advertising revenues, You Tube Ads monetize at a lower rate than other advertising revenues. (Remember R & D is not capitalized as per existing accounting standards)



Alphabet's return on invested capital has reduced from 27.52% in 2015 to 21.88% in 2019. We cannot ignore the base effect of Alphabet's advertising revenues of $ 134.81 billions which account for around 30% of global digital ad spend.Google advertising revenues at least from the developed markets are showing signs of maturity. Google is the market leader by far, when it comes to digital advertising revenues but it faces increased competition from the likes of Facebook, Amazon and others for the global advertising pie.



Alphabet's return on equity has declined from 51.96% in 2015 to 47.22% in 2019.
 


ALPHABET: LIQUIDITY AND SOLVENCY RATIOS


1. Current Ratio = Current Assets/Current liabilities
2. Quick Ratio or Acid test ratio = (Cash+ Short term investments +Accounts Receivables)/Current liabilities
3. Cash Ratio = (Cash and Cash Equivalents + Marketable Securities)/Current liabilities
4. Debt to Capital Ratio = Debt/Debt + Equity (Debt includes all interest-bearing debt)
5. Debt to Equity Ratio = Debt/Equity

Alphabet has heaps of cash, so liquidity position is very healthy as shown below. Working Capital as a proportion of revenues has reduced from 0.94 to 0.66 in the past five years.


Alphabet carries very little interest bearing debt on its balance sheet as shown in the figure above.


The only scare with tech giants is that, they may burn their hands at unworthy acquisitions.

(Inspired by Prof. Damodaran, Data Source: https://in.reuters.com/companies/GOOGL.OQ/financials, Alphabet Annual Report 2019)

Up next: Alphabet: DCF Valuation

Comments

Post a Comment

Popular posts from this blog

How Big Tech Firms have redefined the paradigms of economics!

Not a day passes by without using at least one product or application of the Big Tech companies.  These companies have redefined the long established principles of economics. 1. Networking Effects: Networking effects is the phenomenon where the value of a product increases due to the addition of every new customer/user. The effect of networking in tech industry implies that the company/product which is the 'early mover' has an advantage and the value of the network grows with every additional user. In 'network industries' the equilibrium tends towards a few products and their companies. Consider Microsoft, the predominant operating system of the world. Consumers want to stick to (Microsoft) technologies that are dominant and compatible with all the other users, software and hardware products. Once consumers get used to these applications or products they do not wish to change easily.  Similarly, with Facebook, any new user benefits due to the gigantic network of users a...
Read more

Restating the Neoclassical Theory of Factor Income Distribution

Image
 The Gini Coefficient measures the equality of incomes of the population in an economy. As shown in the image below the % cumulative population is marked on the x-axis and the corresponding cumulative incomes are marked on the y-axis. The red curve showing actual distribution of incomes is called Lorenzo curve and the distance between the line of equality and Lorenzo curve is measured by the Gini coefficient. A score closer to 0 indicates perfect equality whereas a score of 100 indicates perfect inequality. This is a list of 100+ countries sorted by Gini coefficient sourced from https://knoema.com/atlas/ranks/GINI-index It is not surprising for us to note that many of the developing countries are facing high degree of inequality whereas some of the Western European and Scandinavian countries have better income equality. The income inequality in United States is close to that of Uganda and Mongolia! The Neoclassical Theory The traditional neoclassical theory states that factor incom...
Read more

Budget Wishlist 2024

Here's my budget  wish list for 2024: 1 . Universal Basic Income(Support): The total work force of the United States is less than 17 crores using which they are able to generate a real GDP in excess of 20 trillion dollars(2022 wiki). The total workforce of Europe is under 20 crores(2022 wiki). Except for China which has a work force of 78 crores(2022 wiki), no other country has bigger workforce than India which has 55 crores. As per recent KLEMS database of RBI, the workforce number is 64.3 crores but many economists have questioned this number. With the onus on productivity we are moving towards a world in which investments are technology-intensive, definitely not labor intensive. Some economists have envisioned a world where machines take over the bulk of the work load with minimal human intervention. In India, the annual requirement for jobs is around 2 crores whereas job creation per annum is limited to 40 to 50 lakhs in spite of the best efforts of the incumbent government. T...
Read more