The company that we will be discussing its financial status is Google. Now, Google is just a sub company of Alphabet that emcompasses various other companies, each of which is trying to solve a specific problem.
Google is best known for its search Engine that has changed the lives of many over the last decade.
Google was founded by two students from Stanford, and are now the founders of Alphabet: Larry Page and Sergey Brin. Currently, as of 2017, the CEO of Google is Sunday Pichai.
The mission of Google according to its founders is to change the world for the best.
Macro Environmental Analysis
The business model of Google is subject to changes. At any time, external economic factors may change how it operates. More specifically, the most interesting aspects for Google in this matter are:
The stability of markets where it mainly operates
The growth of developing countries
These elements are the key opportunities for the growth of the company.
According to the STEEPLE analysis the main threat for Google is the rise of social media. This in fact is one the most challenges for Google, as it empowers other companies like Facebook (that uses advertisement as business model too )while Google is not strong in this area.
Moreover, Google should do its best to innovate in the mobile part as it is becoming more anchored in people’s lives.
Google’s main flow of money comes from the online community. However, Google too should adhere to environmental and ecological regulations. The main ecological aspects that Google should care about is the search for sustainable businesses.
Google is constrained to legal rules as any other company. The STEEPLE analysis model put limits the way Google operates. The prominent external aspects that the firm should consider seriously are regulations on user privacy, and intellectual property rights.
Google as company is centered around its employees, more specifically it scientists and software engineers. They consider it their strongest and most important asset. On the other hand those employees are expected to deliver creative and excellent products. The culture inside Google is unique in a sense that its employees have a lot of freedom: they are not constrained by time for example, and are also given all the required resources to help them grow.
Google is also known for investing a lot of money and resources on diverse technological fields to maintain their leadership in the industry. They are not afraid of change, and all employees are encouraged to take risks for the sake of innovation (Bloomberg, 2007).
For us to have a better understanding of the Organization’s operations and to conduct a better Analysis for Alphabet. We have thought of implementing a structured planning method “SWOT” analysis to better understand the organization’s: Strength, Weaknesses, Opportunities and Threats to have a better understanding of Alphabet’s internal and external factors that are either favorable or damaging to the business’s operations.
From all of those findings, we can deduce that the sector Alphabet is operating in presents many advantages along with many other external disadvantages threatening the growth of the organization at hand. Following the analysis we can deduce that Alphabet suffers from the financial aspects regarding the strong reliance on Advertising which is basically their main source of profit. Even if it is presented as their largest source of profit it can be highly damaging for the industry to only have one source of income. Moreover, Alphabet finances and invests in many projects such as; Google finance, Book search and picnic that were found to be non-profitable to the business. Regardless of Alphabet’s wide and vast portfolio many of its past products and its newly initiated projects were found to be unsuccessful. Some of the projects required large amount of capital to maintain their survival. Google might be in danger regarding the huge amounts they invest in Research and development, even when it comes to projects that deemed to be a failure. Even if Alphabet presents some major weaknesses, it is still ranked as the Market leader as a search engine, in addition to the leadership position google maintains in online advertising. According to the forecasts by eMarketer, Google might extend its status for 40.7% of the “US digital ad revenues” in 2017. However, considering the Industry in which we are implementing our analysis, one must be aware that these aspects are usually common in the industry as it is full of threats regarding the High competition and maintaining healthy financials. The Industry at hand presents large opportunities that might reassure and down-size many of the weaknesses that are presented above.
Horizontal and Vertical Analysis
Proceeding with a deeper analysis and based on Alphabet’s Balance sheet and Income statement from the years 2015-2016. We are going to conduct a time series analysis that is mainly focused in the changes and trends of Alphabet over time. This Analysis, will allow us to determine cyclicality and growth trends of the company at hand. To conduct the Horizontal analysis we first of all took a close look to Alphabet’s income statement and computing the percent change for each of the most relevant units that actually demonstrates noticeable trends over the years. Regarding the Vertical analysis also known as the “common-size” analysis, it is specifically based on Alphabet’s balance sheet. This analysis however, mainly focuses on the relative size of different units that allows a clear comparison and analysis.
Income statement Analysis: (Horizontal)
For starters, according to Alphabets income statement and specifically its revenues, we can notice a considerable increase of 15.6% in Alphabet’s net income between the years 2015 and 2016. However, as a share of total revenue it is reported that the percentage of net income seem to encounter a less considerable increase of 0.38%. This slight increase however, could be expressed by the increase of both total revenues and operating expenses over the same time period. Alphabet.Inc has also encountered a considerable increase in its revenues during the year 2015 and 2016, since the revenues have experienced an increase of 13.6%. As we have previously sorted in the SWOT Analysis; this trend is mainly due to Alphabet’s strong reliance and main source of income which is; advertisement. This increase might also be due to extensive use of smartphones that has helped many tech companies such as Alphabet to reach the highest number of users and attract even more advertisers.
Regarding Alphabet’s expenses we primarily notice the increase in the organization’s operating expenses that has experienced an increase of 15.33% that is slightly equivalent to the increase of Alphabet’s total revenues to some extent. Regarding the detailed components of Alphabet’s operating expenses it is highly noticeable that this change comes from the heavy investments of Alphabet in Research and Development. To further elaborate this case we can detect that the company spent over 24.92% in R&D. This however, also was reflected in the operating expenses. This heavy spending on research and development might be justified by the fact that most of tech companies are all considered to be leaders in R&D spending. According the website “Recode”, Alphabet is ranked 2nd after Amazon with 13.9 Billion in R&D spending. Moving on with the Selling, general and administrative expense, has encountered a slight increased by 8.59%. According to Alphabet Inc. and Google Inc.: sales and marketing expenses along with the general and administrative expense increased because of; labor, costs and stock-based compensation due to the significant increase in sales, marketing. Moreover, spending is primarily related advertising as well as the heavy costs that are channeled towards professional services. Proceeding with the analysis, we also notice a significant decrease in the Total other income expense that decreased by 61.85% over the years 2015-2016 along with share total revenues that dropped from 1.14% to 0.36%. Alphabet Inc. reported this change from the decreased gains from non-marketable investments that were however linked with an increase in the interest icome because of an inflow of cash and fixed income. Alphabet Inc. during the year 2014, have proceeded with an important operation that had to do with the sale of Motorola Mobiles which resulted in a decrease of 100% in the discounted operations. Regarding Alphabet’s income tax expense, this unit of the income statement has experienced a fall from 5.51% to 4.40% of total revenues. This decrease counts as a percentage of 9.23%. Holding the multinational status, alphabet is subject to many tax regulations impacting the company’s tax expenses.
Balance sheet Analysis:
Going through the analysis of the balance sheet, we can notice an increase in Alphabet’s total assets of about 14 % over the years studied. However, regarding the cash and cash equivalent, the unit experienced a decrease of about 9.7%. The unit basically decreased from 14% to 11%, a decrease that can be elaborated by Alphabet’s cash flow statement portraying big amounts of cash outflows during the 2015. This could be further explained by the considerable increase, regarding the spending’s for the “financial activities”. Over the time period studied Alphabet has spent a lot of cash regarding investments because of the increase in the purchase of marketable securities, with no lending of securities. Due to a considerable increase in long-term investments of about 68.3%, Alphabet have experienced a great decrease in cash. Long-term investments would represent 2.4 of total assets. This must certainly be dues to Alphabet’s repurchase of stocks as well as the many other investments the business undertakes. This heavy investment however, could be understood by the fact that tech companies especially such multinationals with that standing must rely on innovation and change to keep up with competitors. Along with the decrease od cash and cash equivalents we can also notice a significant decrease in Alphabet’s receivables of about 28%. This could be explored by the fact that 96% of Alphabet’s revenues come strictly from Ads and that most of tech companies invest on such digital advertising to gain profit. However not all pay in cash immediately what explains the decrease in Alphabet’s receivables. During the year 2015, we can notice that intangible assets have known a decrease of 16%. According to Reuters.com, Alphabet and Microsoft engaged themselves in a battle that lasted for 5 years in 2010 and ended in 2015. This judicial war had many negative impacts on Alphabet, since Microsoft was clear about taking over patents on devices, asserting on the use of a Microsoft patent.
Total Liabilities and Stockholder’s Equity:
The wholesome of Alphabet’s Balance Sheet reflects an increase of 14.1% in all it’s elements; Total Assets, Total Liabilities and in the Stockholder’s Equity representing 80% of the Balance sheet. Moving to our analysis we can notice a significant increase of 18.9% in Retained earnings. This important change and variation in the company’s Stockholder’s Equity could be explained by the solemn change of Google being replaced by the new parent company Alphabet Inc.
Representing 18.4% and 19.6% of Alphabet’s total capital structure, Liabilities have shown an increase of 7.1 % over the period studied. The most flagrant increase in the unit is delegated to the to the total current Liabilities that increased by 15.1% and the Short-term liabilities which have drastically increased by 60.5%, in addition to long-term liabilities along with deferred liabilities that have decreased by 38%. and 60% following the period studied. A considerate explanation to these variations could be explained by the fact that Alphabet’s liabilities reached a certain maturity that ended up in the long-term units turning into short-term.
We were able to to calculate ratios using various financial statements that we got from Yahoo! Finance mainly.
Number of shares outstanding: 347 734 00
From the the balance sheet and income statement and Yahoo! Finance we managed to get the following:
Total Capital : 120 billions
Working Capital: 70 billions
Share Price: 1,049.38 as December 2017
Book Value per Share: 174.82 as September 2017
Earning Before Interest and Taxes: 19 billion dollars
It is clear that Google is in good standing. The 70 billions in the “Working Capital” shows that Google is able to pay their liabilities.
Google over the years managed to increase their EBIT (17 billions as of 2014), this is a sign that they are generating a positive increase from their business operations.
We further have calculated some ratios in order to enrich our analysis and have a clear view of how Google is operating.
Price to Book-Value: 6.03.
It is clear that today’s market over value the share price (6 times). This a recurrent pattern in service oriented businesses. This can be explained by the fact that those companies owns intangible assets, in this case Google’s business is based on advertisements, which not always show up in those companies’ balance sheets.
Effective Tax Rate: 16.8 percent and is considered one of the lowest one in the silicon valley (siliconbeat)
Cost of Capital: Google has a low debt percentage compared to its equity capital 80
percent to 20 percent of debt (investopedia).
Google Efficiency measures as of 2016:
We have calculated the asset turnover of Google and turned out to be close to 0.15 dollars, this means that it generates that much for every one $ of its assets. If we compared this figure to other companies in the same sector: 0.15 for Apple, 0.10 for Microsoft, and 0.14 for Facebook, we can see that Google is doing a good. This shows that Google values highly Long-term Investment (gurufocus).
As of the receivables turnover ratio, Google has 7.43 as of last quarter 2017. For Facebook it has a turnover ratio of 9.28. This show that Google is more flexible when it comes to receivable collection.
Google has an average of 49 days for collecting their receivables compared to Facebook with 39. This goes along with what we have discussed in the previous section.
Last quarter (Q3 of 2017), Google’s flow of cash was estimated to be 1 billion. It has also grown fifty percent more than previously. According to Business Insiders this mainly due to their AdSense system. How do we know this exactly, actually it is not hundred percent sure, but Google has been hiring extensively in this field over the last quarters.
Google Performance Measures:
Google’s Economic added value is estimated to 7 billions of dollars. This is good for investors, because it shows that the company can pay fully all the shareholders, and still saving 7 billions of dollars.
As of September 2017, Google Return on Invested Capital ROIC is 44.34 (gurufocus), this shows how good Google is generating its cash flow respective to the capital it has invested in its operations.
Google has a positive EVA (Economic Value Added), this shows that it can pay all its shareholders, not just that, Google has a plus of 5000 million dollars. This explains why a lot of people invest in the Alphabet. Moreover, this is holds with the increasing growth calculated, and its profitability.
We also calculated Google’s return on capital (ROC). We found that it equals almost 13 percent. This demonstrates how much in every dollar raised Google is making. More specifically, Google is making 0.13 dollars in net income for every dollar raised.
For the ROA, this ratio shows how much Google is making in net income from its assets, which is 0.12 dollars in this case.
According to the research we have done, Google has a low asset turnover than its competitors — Companies from the same industry (e.g: Microsoft, Facebook …). Even though, it may seem that Google is doing a good job using its assets — The company has an asset turnover of 0.54 as of December 2016 (stock-analysis-on); in addition it works on a profit margin level, too (2 percent). Google’s profit margin is above the average compared to the industry, which is promising.
It should also be noted that Google does not rely on debt, as it thinks that is will hurt the company on the long run. From the leverage ratio, it is clear that it uses equity heavily to finance its business. A comparison of this ratio to the its competitors confirm our saying, also it should be said that this ratio is decreasing over the years.
Here we will juxtapose Google and Microsoft, and discuss our findings.
If we take the net working capital to total assets, then Google has a higher figure (48% for Google compared to 42% for Microsoft as of 2015). According to the analysts, this difference is significant. This demonstrates how efficient Google is with its assets. This also shows how liquid is the company. A clear win for Google.
If we take the current ratio of both companies, then, again, has an advantage. Google’s’ current ratio is estimated to be 4.6 as of 2015 while Microsoft’s one during the same period is estimated to be 2.5. Both are good but, Google has a higher value and this demonstrates how much assets the company has in its acquisition for paying liabilities that are due.
If we move to the cash ratio, then Google again has an advantage. Google has a cash ratio of 3.78 while Microsoft has a cash ratio of 1.94. This shows how much cash is remaining after paying short term debts.
Project A: Google Virtual reality (VR)
Google virtual reality is a project that started with google Cardboard which is a low cost virtual reality platform. A head mount for smartphones is necessary in order to use it properly. The mission of such a low cost system is to encourage interest and development in virtual reality. Indeed, users can either buy an already manufactured one or they can build their own with cardboard by following instructions given by Google. In order to use the platform, one should download and run Cardboard-compatible applications on their smartphone and then place the phone into the back of the viewer. Created by two Google engineers named Damien Henry and David Coz, the platform was first introduced at the Google I/O developers’ conference. In fact, the viewer and the material used are so cheap every attendees at the conference received a free Cardboard viewer. The cardboard software development kit available for Android and iOS operating systems was such a success that through March 2017, 10 million Cardboard viewers has been sold and the application has been downloaded over 160 million times. Such a success cannot be ignored, and Google decided to take this project one step further and develop an enhanced VR platform known as Daydream. This project has been in development since 2016 and is the one we will be studying.
Project B: Google Home
Our second project is Google Home, a brand of smart speakers developed by Google. Announced in May 2016 and released later that year in the United States, the device enables users to use voice commands in order to interact with services through Google’s assistant. As such, it is possible to close windows or turn of lights or even ask for the temperature outside using the speaker. It is also possible to listen to music, control playback of videos and photos or receive news updates. While, Google Home speakers are limited to one by room, one house can hold many speakers each in a different room and serving a different purpose. They can even be synchronized to play music or to interact with one another in any specific way. The update of May 2017 saw the speakers enhanced with many new and free revolutionary services such as proactive updates ahead of scheduled events, free hands-free phone calling in North America, Bluetooth audio streaming and the ability to add reminders and calendar appointments. The shape of the speaker is easily recognizable as it is a cylindrical white speaker with colored LEDs status on the top for visual representation of its status. While not necessary in most homes today, it is particularly useful and helpful to have such a high technology speaker in a fully automated environment, as it guarantees a better level of comfort but also gains a considerable amount of time. The system is especially successful in California and the place of its birth, the Silicon Valley, as almost every house over there is fully automated.
Comparing Project A and Project B
After analyzing the data we had, it is clear that both project are profitable. Since the projects are not mutually exclusive, the only reason for the company to not undertake such projects are their high initial costs. For the sake of our comparison, we will assume they are mutually exclusive to choose the most profitable one. In order to deliberate, we will be using mostly the Net Present Value given (NPV) in the table above, as it is the most commonly used investment rule in order to undertake financial decisions. As for the payback period and the IRR, they will mostly help guide management decisions and give estimates about the profitability of each project. It can further not be ignored in making this particular decision, given the fact that the difference between the two Net Present Values amounts to $6 billion, which is quite significant. In this case, the Google home project has a NPV that largely exceeds that of the first project, meaning it is the project that will benefit the company and its stockholders the most.