We have owned GOOGL shares in client portfolios since inception (2018). GOOGL has not been spared the tech wipe-out and has lost 40% of its value year-to-date. The company’s core advertising business does have some cyclically and expectations for future earnings have been revised lower. Back in April, analysts thought GOOGL would earn about $6.12 per share over the coming year. Now analysts think earnings will be around $5.27. This represents a 14% decline in expected earnings relative to peak estimates. The negative reductions are not wonderful but when we think about Google’s long-term positioning as a business, it’s challenging to identify something that has changed. Arguably, Google’s position is so dominate and essential that if it were to cease operating for some reason, a significant portion of the internet and modern life in general would simply stop functioning. The company has built an incredibly profitable business around its dominate position, enjoying operating margins (EBIT) of nearly 28% over the past year. Reflecting the company’s scale and its profit margins, GOOGL has also amassed a net cash position over $100B on balance sheet. Looking back over the past 10 years, GOOGL has traded at an average P/E ratio of 23x. Negative revisions spark valuation contraction, as we’ve discussed, and numbers might still be headed lower. Nevertheless, the current P/E on 2023 and 2024 EPS estimates are 16x and 14x, respectively. We can’t say the valuation won’t go lower first, but we ultimately expect GOOGL will grow its earnings again even in a post-bubble Powell-controlled world and we feel confident that valuations will expand from current levels when the positive inflection becomes visible.
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