Remember when former CEO of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) Eric Schmidt rhetorically asked, “If we have a billion people using Android, you think we can’t make money from that?”
Fast forward nine years to today, and Android remains free. Money has been knowingly left on the table as its other businesses, notably online advertising, have done exceedingly well, rendering no immediate need to upcharge for their widely used operating system. Schmidt has further posited, “…all it would take is $10 per user per year…” This could potentially lead to a meaningful lift in GOOGL stock.
Alphabet is an astoundingly dominant company with powerful tailwinds today in search, digital advertising, cloud and computing platforms. It is the indisputable leader in search with toeholds in a variety of other businesses that the market have yet to be fully recognized in GOOGL stock price.
In particular, the market is not giving credit for a potential world in which Android is not free, nor is it accounting for YouTube.
Alphabet Can Monetize Android
Going back to Schmidt’s round number of $10 per Android user per year. On a user base of over 2 billion monthly active users (equal to 85% global mobile operating system market share) that would conservatively be an additional $20 billion of pre-tax cash flow. GOOG currently trades at a trailing price-to-earnings ratio of 28x, which would mean that incremental cash flow would be value at $520 billion. On a share count of 750 million, that calculates to $693 per share.
This alone would catapult GOOGL stock close to $2,000 per share.
Earlier this year, we saw G Suite Basic Edition rising from $5 per user per month to $6 per user per month and the G Suite Business Edition rising from $10/user/mo to $12/user/mo. This demonstrates current CEO Sundar Pichai’s willingness to upcharge and assert pricing power.
GOOGL Stock is Worth More Broken Up
Regulatory risk is often discussed with respect to Alphabet, but I am less concerned about this, as I believe if the company were broken up, investors would be forced to value each of its businesses separately with full transparency, which I believe would result in a sharp, upward re-valuation.
Most obviously, the market is currently undervaluing YouTube. Since GOOGL does not break YouTube financials out separately we don’t know how dominant they are, but Netflix (NASDAQ:NFLX) CEO Reed Hastings has famously spoken of “YouTube Envy” in 2017.
“YouTube is earning over a billion hours a day of consumers’ time with one type of entertainment, while we are earning over a billion hours a week with our type of entertainment.”
Take a moment to let that staggering figure sink in — a figure that has no doubt increased since Hastings made the comment.
A billion hours a day of consumer eyeball time.
Based on that number alone, it would be a mistake for people to think that a voluntary or forced break-up would be bad for GOOGL shareholders. In fact, I am inclined to believe that shareholders would benefit massively as YouTube gets undervalued by being one of many businesses under the Alphabet umbrella. If the business were to trade closer to a Netflix-esque multiple, there would a huge uplift in equity value.
YouTube is nothing short of an incredible platform. Netflix has been valiantly trying to close the gap, but it operates on a fundamentally different model of subscriptions and mostly scripted content that they haven’t been shy in shelling out for in the billions. Award season has validated this content investment from a critics standpoint, but it isn’t clear yet that this will ultimately turn Netflix into a more consistently profitable company. YouTube has a much more compelling and obviously sustainable platform.
Given how much more eyeball time YouTube has over Netflix, it’s not unreasonable to believe that YouTube on a standalone basis would be worth more than Netflix. Right now, that value isn’t fully captured in GOOGL stock.
GOOGL Stock Option Value
In terms of divisions that have potentially significant option value, I would point to Waymo, Google Hardware, and GCP. Waymo, an autonomous driving technology, looks on track to make some major technological breakthroughs in the next few years. Google’s Hardware segment that include Nest, could also turn into a big win. GCP, a rather distant third place to AWS and Azure, has the only all-inclusive platform (G Suite) to compete with Microsoft Office and should not be written off.
Each of these broken out on its own would be more valuable to GOOGL shareholders.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
