Alphabet: A Buy When Cash Is King

  • As interest rates rise, cash is king
  • Alphabet (GOOG,GOOGL) is a Cloud Czar because of its cash flow
  • The challenge is to invest the cash to generate more, not to pay out dividends
A person sits at a open laptop with Google open on the screen, while holding a phone with Google search also open on the screen. GOOG stock, GOOGL stock.

Source: PK Studio / Shutterstock

In a world of rising interest rates where cash is king, Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) is the King of Cash. This means there are 140 billion reasons to like Alphabet stock. That’s how much cash was on the company’s books at the end of last year.

Here is another number: 91.6 billion. That’s how many dollars in operating cash flow the parent of Google generated in 2021. That is up from 65 billion in 2020.

Thanks to cash, Alphabet can spend $5.4 billion on Mandiant (NASDAQ:MNDT) and barely notice. It is just about scale, says Chief Financial Officer Ruth Porat.

Also thanks to cash, Google can invest $25 billion in capital annually without a qualm. Thanks to cash flow, all Google’s cloud data centers, fiber lines and office buildings are basically debt-free.

GOOG Alphabet Inc. $2,805.69

The New Model for GOOG Stock

Throughout the 20th century, industrial companies grew by borrowing money. When they had enough cash to pay their bills, including their debt service, they handed the remainder to shareholders as dividends. That is how AT&T (NYSE:T) was built. It is also how International Business Machines Corporation (NYSE:IBM) was built.

When the cloud opportunity appeared early this century, requiring $1 billion of investment per quarter, these companies saw it as too expensive. The Cloud Czars, led by Google, jumped in with their cash flow. Meta Networks (NASDAQ:FB), then known as Facebook, put their cash on clouds before they were even guaranteed the necessary cash flow.

At Google and the other Cloud Czars, cash flow becomes capital, which then becomes more cash flow. The value is reflected in the market capitalization of the business. Investors no longer buy stocks for their dividend income. We buy stock for capital gains. The value of Google shares has risen 234% over the last 5 years, 47% per year. Who needs dividends?

Threats to Cash Flow

What investors need to watch out for is threats to cash flow.

The antitrust bill just endorsed by the U.S. Department of Justice is a threat to cash flow. That is why Google hired an “Astroturf” organization to fight the bill, taking a page from AT&T. For now, the bill is going nowhere.

The value of cash flow is reflected in the stock price. That is why Google has joined Amazon.Com (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) in splitting its stock.  The split makes the shares more affordable to small investors, thus raising its total value. Whether the shares cost $3,000 each or $150 each doesn’t matter as much as the total value, now $1.89 trillion.

Another threat to cash flow is a failure to invest. Google must constantly find new investment areas to gain new cash flow. Hardware is one such undeveloped area. Google has a full line of hardware – streaming sticks, watches, PCs, phones – which remain minimally exploited. The losses at Google Cloud are less important than the fact that it generates cash flow.

The Bottom Line on GOOG Stock

The Cloud Czars weren’t the first companies to learn the miracle of cash flow. Berkshire Hathaway (NYSE:BRK-A) has been doing this for decades. The difference is that Warren Buffett’s cash flow comes from insurance, while Google’s money rains down from the clouds.

Clouds are the ultimate cash flow business.

Amazon is most famous for this understanding. It put money into the cloud to generate cash. It built out its warehouse and delivery network to generate cash. In its earnings releases, it always lists its cash flow first ahead of the balance sheet and income statement.

This is how you should invest today. Look at a company’s cash flow statement first. If there is operating cash flow, ignore things like dividends and buybacks. They’re just proof management hasn’t anything better to do with your money.

On the date of publication, Dana Blankenhorn held long positions in GOOGL and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.


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