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Anagnostou Evan
Insights about Investing, Valuation and Risk Management
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Hello everybody. In this post i am trying to estimate the decisions of $ALPHABET managers. Enjoy!


There is no good or bad CEO, there are CEOs that fit best during a specific time in a company. For example, when your company is young and growing fast, you want an overconfident CEO taking risks. But when your company has matured and declined then you need a CEO with calmer decisions.


I often read on social media and hear in discussions that I should invest in companies with particularly good management, and when I ask them how they measure it, I don’t get a clear answer. In this post, I will try to assess the management team of Alphabet running a reverse engineering approach:
First, I will try to estimate in which Corporate Life Cycle Alphabet is, from the profitability metrics, reinvestment rate, capex, debt, and growth. Second, I will attach the appropriate profile of the CEO in this stage of business and finally, I will look at how the managers of Alphabet are disciples under these characteristics.


Revenues and Operating/Net Margins: As the diagrams show Alphabet has high revenues that are increasing, not as in the early years of the company, but are high with stable growth between 10% to 40%. Furthermore, looking at operating and profit margins is clear that are very high but stable (between 10% to 30%) which is very logical because is the biggest company in advertising and at the same time trying to compete in cloud services with Microsoft and Amazon. As a result, from revenue and operate/net margins perspective, Alphabet is on Mature Growth phase.

Economic Policy and Free Cash flows:

What we get from the diagrams below is that:
  1. Cash & cash equivalents are steadily increasing (with no dividends).
  2. Total debt was scant in the first years but after 2012 has started to increase.
  3. Capital Expenditures (Capex) also increase as the company ages.
  4. Free Cash Flows are positive and growing (stable), with margins of approximately 20%.

ROIC/Reinvestment Rate and Growth: It is obvious that in the first years of the Alphabet (until 2007) the growth was very high, which is logical because as a young company, you reinvest most of your money and ROIC increasing. But as the years passed, the reinvestment rates are decreasing and ROIC has been almost stable, with a growth (on average) of 10%. However, ROIC on average is 25% and the WACC for Alphabet is approximately 12% which means that the company creates value from its business model.

(Note: I often read that as an investor I should look for companies with high growth which is wrong. An investor needs growth that creates value and derives when ROIC > WACC)

Competitive Advantage: Looking at the revenues from the last 10K, Alphabet is 85% advertising, 10% cloud service, and 5% others (Hedging, Google stores, pixel, etc.) To make the calculation easier I will attach 5% to the advertising sector and I will behave to Alphabet as a company that is 90% advertising and 10% cloud services. Below you will find a diagram where I have measured the average cost of capital, operating margins, net margins, reinvestment rate, ROIC, and growth for the advertising and cloud services sector but also for Alphabet.


Alphabet is a company where revenues are stable but increasing at a high rate and at the same time has higher operating and net margins in comparison to the other two sectors (24% vs 10%). On the other hand, to achieve high and stable margins should reinvest a lot of money, approximately 40%, with a low Return on Invested Capital relative to the two sectors (25% vs 50%). As a result, and looking at the last 5 years, the company has grown at the same pace as the overall advertising sector.


Now that we have finished with the number's (financial metrics), the “Right” CEO is that person who seek for opportunities to the market (for example Bard AI tool, healthcare services, expanding advertising services, cloud centers etc.) and trying to synchronize the narratives with the numbers. Below, i have a table that I illustrate some information’s from Annual 10k 2022 which prove that managers are in synchronize between numbers and the appropriate story for a company, in a Mature Growth phase.


I believe that a connection between story and numbers can derive efficient results when combined correctly. My initial thought was to run a reverse engineering approach where I measured specific financial metrics that gave me a clear picture of the Alphabet Corporate Life Cycle (Mature Growth phase). The second step was to attach the “utopia” CEO for this phase (Mature Growth) and to examine if narratives (from Annual report) from the current management team are in sync with the narrative of the “utopia” CEO.
As a result, Alphabet is a well-managed company which should expand its products, keeping at the same time the operating margins high and stable even with high reinvestment rates. It is obvious that good times of high growth are back but should keep his competitive advantage, either from high capital expenditures, which will expand the infrastructure and the data centers or with the appropriate balanced between revenues and operating expenses (internal efficiency) that will keep operating margins high and stable. Thank you.

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Valuation of – Thoughts, Narrative and Intrinsic Value
I believe that every good valuation starts with a narrative, a story that you see unfolding for your company in the future. In developing this narrative, I will try to make assessments for (its products, services, and management), the market, the competition, and the macro environment in which operates trying to:
  1. Keep it simple.
  2. Keep it focused.

To come up with a value, I will use a DCF model for Amazon Retail/Media, Amazon Web Services, and a valuation method for Amazon Prime

Breaking down the Business model

Sometimes in the valuation process, we should adjust the way the accountants break down the businesses. In this section, I will break the business model of Amazon into three main components, and I will use a DCF model
separately for retail/media, Amazon Web Services, and Amazon Prime. I will reallocate the revenues as follows:
  1. Revenues from Retail/Media.
  2. Revenues from AWS.
  3. Revenues from Amazon Prime Memberships.

Thereason, why I believe I should reallocate the revenues is because, from an accounting point of view, we cannot value the “buying power” of Amazon Prime Membership which is at the heart of the investment
philosophy (obsession with customers). Secondary reasons to reallocate revenues are as follows:

Third-party services
Are commissions/fees which come from third-party retailers who sell their products in stores and fulfill orders through Amazon. Consequently, we can suppose that these are revenues that can be attributed to Online/Physical stores, FBA, or from the «buying power» of Amazon Prime members.

Advertising services: Amazon provides advertising services to sellers, vendors, publishers, authors,
and others, through programs such as sponsored ads, display, and video advertising. Revenues that are recognized as ads are delivered based on the number of clicks or impressions. Consequently, we can suppose that our revenues while someone navigates the Online stores or/and from the Amazon Prime membership.

Subscription services: Subscription sales include fees associated with Amazon Prime memberships and access
to content including digital video, audiobooks, digital music, e-books, and other non-AWS subscription services. Consequently, I can assume that revenue comes entirely from the membership of Amazon Prime. (I have
upload two pictures that are showing how i breakdown the business model)

Main narrative for (2023) is the leading company in global e-commerce and cloud computing services with an “army” of Amazon Primers, looking to consume every available product. On the other hand, high competition in cloud
computing and high costs from retail businesses make it very difficult to sustain as a leader in the field. I will assume that the company will remain prominent in global e-commerce but every competitive advantage
of AWS against Microsoft and Google would be eliminated (i have upload two pictures that show my valuation for Retail/Media business and AWS business plan).

Valuation of Amazon Prime: I have evaluate this service in accordance with the following paper:
##### Conclusion
Value as of Feb 14, 2023
Amazon Retail/Media : $ 472,365.23
AWS: $ 391,105.71
Amazon Prime: $ 258,826.26
Value of Operating Assets: $ 1,122,296.94
Plus Cash: $ 53,888.00
Minus Debt: $ 135,000.00
Plus Value of Equity: $ 146,043.00
/ Number of shares: 10,189.00
Value per share: $ 116.52
Market share: $ 98.29
Undervalue: 18.55%
A good valuation stands between the numbers and narratives. I tried to
make estimations in fundamental factors, looking at the history of the
company and then I adjusted them to reflect the high competition and the
macroeconomic effects. I believe that the main advantage of
in near future would be cloud computing, which is estimated at 34% of
the global cloud services, but in long term, the competitive advantage
will be eliminated but will remain the global leader in e-commerce.
I hope all of you having good investments.
If you like my work please don't forget to share. Thank you

Corporate Governance and Profitability Metrics for
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Do you believe that I am optimistic in my valuation?
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7 VotesPoll ended on: 3/5/2023

Nathan Worden
@nathanwordenMarch 4
Valuing Amazon is no simple feat, great work here.
+ 1 comment
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