Latest / The Dutch Investors / #64 | Alphabet Deep Dive | Other bets & Valuation w/ Secret Sauce Investing | Part 2

Transcript

#64 | Alphabet Deep Dive | Other bets & Valuation w/ Secret Sauce Investing | Part 2 · The Dutch Investors

• 0:21
  SPEAKER_02: I need a DNA million idiots.
• 0:28
  SPEAKER_02: Are you born with it?
• 0:29
  SPEAKER_02: Is it DNA?
• 0:30
  SPEAKER_02: Is it some early childhood exposure?
• 0:37
  SPEAKER_01: Welcome back to part two of our conversation with Sonny.
• 0:43
  SPEAKER_01: We just talked about Alphabet for over 70 to 80 minutes.
• 0:49
  SPEAKER_01: We talked all about AI, the business model, things to like, risks, opportunities.
• 0:55
  SPEAKER_01: But what we didn't talk about is if you talk about Alphabet, we have to talk about Waymo and the Autobat segment and the valuation.
• 1:04
  SPEAKER_01: How do we even value a company like Alphabet?
• 1:06
  SPEAKER_01: What do we think it's worth?
• 1:08
  SPEAKER_01: And we'll draw a conclusion about the company.
• 1:12
  SPEAKER_01: How about you jump in, Sunny, with your thesis on the Autobet segment?
• 1:18
  SPEAKER_01: What is there to look at?
• 1:20
  SPEAKER_01: What is there to like, or what is there not to like about the Autobat segment from Alphabet?
• 1:26
  SPEAKER_00: So Google, uh one of the segments Google has in its financials is Other Bets.
• 1:32
  SPEAKER_00: And OtherBets almost seems a little bit like where Google has too much money and they sort of just want to invest into things they find fun.
• 1:41
  SPEAKER_00: There's not really been any obvious success from Google's other bets over the last decade or so.
• 1:48
  SPEAKER_00: Um you know, there is the likes of Waymo.
• 1:51
  SPEAKER_00: Now, Waymo for for anyone who's not familiar with that, so I think I don't think there's any any Waymo in Europe.
• 1:57
  SPEAKER_00: Is that my right in saying that?
• 2:00
  SPEAKER_01: Not yet.
• 2:00
  SPEAKER_01: They're looking to expand into certain new states and certain new cities, but I don't think they're operating in Europe just yet, which is probably also due to regulations.
• 2:13
  SPEAKER_01: Europe loves to regulate stuff like this.
• 2:16
  SPEAKER_00: Yes, so uh I think I don't know who's worse, sort of Europe or the UK, but um Wiimo, for anyone who's not familiar with it, is similar to Tuber, but it's for autonomous driving.
• 2:27
  SPEAKER_00: And for me, for so long, you know, for the research I've done on Google and kept an eye on things for the last several years, Waymo's almost been like one of these things that sounded a bit like a waste of money.
• 2:37
  SPEAKER_00: You know, it didn't really sound like it was ever going to go anywhere.
• 2:41
  SPEAKER_00: It's always sounded like it was so far behind everyone.
• 2:43
  SPEAKER_00: However, I think what's really interesting is we're now seeing the fact that Waymo has uh driven users over a hundred million miles on public roads.
• 2:53
  SPEAKER_00: Google has estimated to spend or its estimate has been about 30 billion is invested in Waymo sort of up to like 2024.
• 3:03
  SPEAKER_00: Now, is it the case, Seam, that we're looking at Google's first sort of Google-sized business success in Waymo, that you've got a multi-billion dollar.
• 3:15
  SPEAKER_00: Put your thoughts on it.
• 3:16
  SPEAKER_00: I mean, obviously, I I think where where it's difficult is you and I both use Google products right across the range, which probably feeds into our bias.
• 3:24
  SPEAKER_00: But Waymo is one of these products that I've no doubt everyone will be super excited to use it when it does land in in Europe and in the UK.
• 3:32
  SPEAKER_00: But it's difficult to sort of judge that.
• 3:34
  SPEAKER_00: I mean, obviously there's numbers there, you know, 100 million miles on public roads is a big number.
• 3:40
  SPEAKER_00: Is it really a true threat to the likes of Uber?
• 3:44
  SPEAKER_00: Or is it just overblown?
• 3:45
  SPEAKER_00: Are we are we looking at something here that is genuinely going to land in the next sort of couple of years and really make it big?
• 3:51
  SPEAKER_00: Or again, is this just something that that's overhyped that Waymo will just sort of carry on in the background?
• 3:56
  SPEAKER_00: What's your thoughts?
• 3:59
  SPEAKER_01: I I I was very excited to talk about Waymo.
• 4:02
  SPEAKER_01: So I did I did some nepkin meth and I'll I'll take I'll guide you through it in a second.
• 4:08
  SPEAKER_01: But I'm pretty excited about Waymo.
• 4:11
  SPEAKER_01: First of all, I have never used a Waymo, I never use a taxi anyway, I just drive there myself, but I can imagine in busy cities, especially in America, that this can really become a thing.
• 4:26
  SPEAKER_01: So let me just take like the top view of what Waymo is and uh and its cost structure.
• 4:32
  SPEAKER_01: So Waymo currently charges about$20 per ride on average.
• 4:38
  SPEAKER_01: It's a bit more expensive than uh most other taxis for now.
• 4:43
  SPEAKER_01: Recently, the company reported to be completing around 250,000 pay trips per week across Phoenix, San Francisco, Los Angeles, and Austin, Texas.
• 4:56
  SPEAKER_01: That is about 1 million rides per month, which translates into about 20 million in monthly revenue, or about 240 million dollars annually.
• 5:12
  SPEAKER_01: So here's some simple back of the envelope projections for 2030.
• 5:18
  SPEAKER_01: Want me to take you through it?
• 5:20
  SPEAKER_01: Yeah, I'd love to hear it.
• 5:22
  SPEAKER_01: So I made four scenarios, well, three actually, but the first is the current scenario.
• 5:29
  SPEAKER_01: So they operate in four cities, one million monthly rights, twelve million annual rights, an average fare of$20, which generates$240 million in annual revenue.
• 5:41
  SPEAKER_01: I don't know about the margins, probably they don't have any margins yet, but just uh to give you some uh rough numbers here.
• 5:49
  SPEAKER_01: So in the bear case, let's say in 2030, so five years from now, they operate in eight cities.
• 5:56
  SPEAKER_01: So they double the amount of cities.
• 5:59
  SPEAKER_01: Sounds pretty reasonable to me.
• 6:00
  SPEAKER_01: So that means 2 million monthly rides, 24 million annual rides.
• 6:06
  SPEAKER_01: Let's say they lower the price a bit to$15 per average fare, which translates into 360 million revenue, million dollars revenue annually.
• 6:20
  SPEAKER_01: But I think this is a very, very bare case.
• 6:25
  SPEAKER_01: Let's say they go to 16 cities in 2003.
• 6:31
  SPEAKER_01: This would translate into 4 million monthly rights, which translates into 48 million annual rights.
• 6:41
  SPEAKER_01: Let's say they can charge$22 per ride on average, that would mean over a billion dollars in revenue annually, and they operate in just 16 cities.
• 6:52
  SPEAKER_01: Now extrapolate that to let's say they operate in the UK, the United States, Europe, maybe even China, I don't know, Canada.
• 7:04
  SPEAKER_01: The potential is massive here, and that is why Tesla is going this route as well.
• 7:10
  SPEAKER_01: They want a autonomous taxis, is a massive opportunity.
• 7:15
  SPEAKER_01: Why do I think Waymo will win?
• 7:18
  SPEAKER_01: Waymo uses LIDAR and Tesla uses cameras.
• 7:23
  SPEAKER_01: So, first of all, LIDAR used to be very expensive, it used to be hundreds of euros for a couple um a couple components.
• 7:32
  SPEAKER_01: And Tesla chose the different routes and went for cameras because it was a lot cheaper.
• 7:39
  SPEAKER_01: The problem they're running into now is that you can't see everything with cameras.
• 7:44
  SPEAKER_01: There's a lot of things in in daily life that is hard to see and anticipate.
• 7:52
  SPEAKER_01: LiDAR can see a lot further, and the technology has become so cheap, it costs just a couple bucks now for a couple sensors.
• 8:02
  SPEAKER_01: So that is why Waymo is so far ahead from Tesla.
• 8:07
  SPEAKER_01: Can they change this?
• 8:09
  SPEAKER_01: Probably.
• 8:10
  SPEAKER_01: I think Tesla can probably become a good competitor.
• 8:14
  SPEAKER_01: But I think the LiDAR technology will give them a massive edge.
• 8:19
  SPEAKER_01: And um, yeah, I can see myself taking a Waymo over a real taxi.
• 8:23
  SPEAKER_01: I I don't I think that's eventually it becomes a lot safer if every taxi is autonomous and uh the the traffic becomes a lot more efficient.
• 8:33
  SPEAKER_01: I can see uh a lot of good things happening here.
• 8:38
  SPEAKER_00: Consider Uber, it's a$200 billion market cap right now.
• 8:44
  SPEAKER_00: Only a small slice of that is Wimo's target, in my opinion, is going to be the taxi market.
• 8:51
  SPEAKER_00: There's probably autonomous freight in haulage.
• 8:54
  SPEAKER_00: That probably makes even more sense to target with autonomous vehicles.
• 8:58
  SPEAKER_00: If you're going cross country, I think there's obviously the maintenance of the taxis, the cleaning.
• 9:03
  SPEAKER_00: Consider freight, you know, going across country, going across the world.
• 9:06
  SPEAKER_00: What does the opportunity look like?
• 9:08
  SPEAKER_00: You know, it's even bigger than Uber's$200 billion market cap.
• 9:13
  SPEAKER_00: You could be looking at a trillion dollar plus business if Waymo can get right.
• 9:18
  SPEAKER_00: Now, there's obviously regulation on a country-by-country basis, and that is certainly something to watch.
• 9:24
  SPEAKER_00: But for me, I was delighted to hear about the successes of Waymo, especially through through the acquired episode and um and the research for this podcast.
• 9:34
  SPEAKER_00: It's almost difficult to really sort of get to grips with it without having used the Waymo, because I think there's almost anecdotal evidence that you want to support this.
• 9:44
  SPEAKER_00: But again, you know, I'd just conclude that I don't think it's it's the taxi segment of Waymo is only the start.
• 9:52
  SPEAKER_00: If you consider that I don't know how many vehicles are on the road, that's the real opportunity.
• 9:59
  SPEAKER_00: Yeah, not much to add there.
• 10:01
  SPEAKER_00: I would have to agree.
• 10:03
  SPEAKER_00: Oh, so I think we've got two more sections to cover.
• 10:06
  SPEAKER_00: Do you want to kick up the valuation?
• 10:10
  SPEAKER_01: Uh yes, I would like so, because this was this is the difficult part of Alphabet because there's so many moving parts, and I I decided to value Alphabet on the following segments, which is Google Search, YouTube, the Google Network, the Google subscriptions and devices, Google Cloud, and then the Google Other bets, mostly Waymo for now.
• 10:38
  SPEAKER_01: And as our TDI members know, you can see it in our uh in our written report, in our deep dive.
• 10:46
  SPEAKER_01: I made like this estimated operational profit for these different segments and applying a multiple to it.
• 10:55
  SPEAKER_01: And for example, I think YouTube is probably going to generate about 16 billion dollars in eBIT in 2030, if not more.
• 11:06
  SPEAKER_01: I'm being pretty conservative here.
• 11:08
  SPEAKER_01: Apply a 25 times multiple on that, and you have YouTube being worth about 400 billion dollars in enterprise value.
• 11:17
  SPEAKER_01: Well, if you run through a couple of these segments, for example, Google Cloud.
• 11:22
  SPEAKER_01: I think Google Cloud is a major growth engine.
• 11:25
  SPEAKER_01: It's going to be a lot more profitable.
• 11:28
  SPEAKER_01: 35 billion in eBIT in 2030 doesn't seem unreasonable.
• 11:33
  SPEAKER_01: Apply 35 times multiple on that, and just Google Cloud is worth 1200 billion.
• 11:39
  SPEAKER_01: If we combine all these things together, I arrive at a valuation of about 3.7 trillion in 2030, which is just$500 billion away from what it is today.
• 11:54
  SPEAKER_01: So the IRR on Alphabet at the current price doesn't seem very attractive to me.
• 12:00
  SPEAKER_01: It's probably low single-digit.
• 12:04
  SPEAKER_01: How did you approach this?
• 12:06
  SPEAKER_00: I would I would agree that Google can be valued on some of the parts valuation.
• 12:12
  SPEAKER_00: But I'm gonna respond to that with another question for you.
• 12:16
  SPEAKER_00: Is Google stronger as a company with its some of its parts and its ecosystem?
• 12:22
  SPEAKER_00: Or is it genuinely the case that Google's segments can be valued independently?
• 12:28
  SPEAKER_00: Because even if we take that and we look at at Google Chrome perplex uh perplexity, they offered, you know, when there was the the case going on, um the monopoly case going on during the summer, they offered to buy Chrome for about$34.5 billion.
• 12:44
  SPEAKER_00: Now, for me, that's just a scenario that Chrome, based on the user base and and what it does for the company, is worth so much more than that.
• 12:52
  SPEAKER_00: And I just can't, you know, I think what we're looking at here is yes, these segments are probably have a value that's maybe true or slightly more valuable, uh slightly overvalued in comparison to what Google's market cap is today.
• 13:06
  SPEAKER_00: But actually, I think if you take one of these segments out of the Google ecosystem, they're probably worth a lot less.
• 13:13
  SPEAKER_00: What do you think of that?
• 13:15
  SPEAKER_01: Yes, I would agree that having all these different segments together makes them a lot more valuable.
• 13:22
  SPEAKER_01: I think Chrome itself.
• 13:24
  SPEAKER_01: I think Chrome itself is not worth a lot.
• 13:26
  SPEAKER_01: I think the value from Chrome arises from all the other segments and what it allows you to do.
• 13:33
  SPEAKER_01: And the same sort of goes for YouTube and Google Search.
• 13:38
  SPEAKER_01: Everything and all the apps and the devices, it become a lot more valuable because of what you can do with it and the way it works together.
• 13:49
  SPEAKER_01: So, does it make sense to do some of the parts?
• 13:52
  SPEAKER_01: I would say so, because it's just a very rough estimate, and it just gives you an idea of what each segment is sort of worth.
• 14:04
  SPEAKER_01: Is it set in stone?
• 14:05
  SPEAKER_01: Absolutely not.
• 14:06
  SPEAKER_01: Can it be 5 trillion?
• 14:08
  SPEAKER_01: Absolutely, but it's just to give you an idea of what the different segments could be worth if they were standalone businesses.
• 14:17
  SPEAKER_01: Can you value this with a DCF or like a reverse DCF?
• 14:22
  SPEAKER_01: Absolutely.
• 14:22
  SPEAKER_01: Yeah, I think you should.
• 14:24
  SPEAKER_01: And at the end, it all comes down to assumptions and just having a rough idea of what you're buying is going to be worth more in the future.
• 14:32
  SPEAKER_01: That was sort of my goal with um doing the sum of the parts.
• 14:36
  SPEAKER_01: But I'm very curious how you would value a company like Alphabet.
• 14:40
  SPEAKER_00: I think it's tough.
• 14:41
  SPEAKER_00: I think we're in a market that we obviously we've referenced multiple times that I certainly feel is overvalued.
• 14:49
  SPEAKER_00: I would always typically do a DCF for a company.
• 14:53
  SPEAKER_00: Now, I've not came with a DCF today because I look at sort of the historic earnings ratios, you know, price sales, and it is clear that Google is overvalued than it was on a historical basis.
• 15:08
  SPEAKER_00: But again, if we compare it to its peers and where there is some really frothy pricing, it's around the likes of NVIDIA.
• 15:16
  SPEAKER_00: If you could only invest in one of, say, the Mag 7 today, Google probably is the best bet.
• 15:24
  SPEAKER_00: But I don't think that it makes sense from my own perspective to be topping up as a shareholder.
• 15:31
  SPEAKER_00: I would certainly wait for a pullback opportunity that I didn't see as affecting the long-term outcomes of Google and Alphabet.
• 15:39
  SPEAKER_00: So I've not got a lot to add there.
• 15:41
  SPEAKER_00: I think you've covered it pretty extensively.
• 15:43
  SPEAKER_00: I just feel that we're in a market that we're literally seeing all-time highs.
• 15:49
  SPEAKER_00: Earnings are reported tomorrow.
• 15:51
  SPEAKER_00: That'll be an interesting outcome.
• 15:53
  SPEAKER_00: I've not got anything else to add.
• 15:55
  SPEAKER_00: I don't know if you'd like to sort of conclude the evaluation section.
• 15:58
  SPEAKER_01: Yeah, I don't I don't like people saying the market's overvalued.
• 16:03
  SPEAKER_01: Um, because the market is at an all-time high almost all the time.
• 16:09
  SPEAKER_01: That's literally how the stock market works.
• 16:11
  SPEAKER_01: If you zoom out, the SP 500 has hit record highs, I believe, in like 70% of all years since it began.
• 16:20
  SPEAKER_01: Every new innovation, railroads, cars, computers, the internet, AI, eventually pushes productivity and profits higher.
• 16:32
  SPEAKER_01: And when someone says it's never been this expensive before, or the stock market is overvalued, it often just means that I wish I'd bought earlier.
• 16:44
  SPEAKER_01: Look, the market isn't supposed to feel cheap, it's supposed to feel uncertain.
• 16:51
  SPEAKER_01: If it felt comfortable, it wouldn't offer returns for investors.
• 16:57
  SPEAKER_01: Do I think the market is frothy?
• 16:59
  SPEAKER_01: Yes.
• 17:00
  SPEAKER_01: Do I still think there's opportunities?
• 17:02
  SPEAKER_01: Yes.
• 17:03
  SPEAKER_01: Do I think there's a bubble?
• 17:06
  SPEAKER_01: Probably.
• 17:07
  SPEAKER_01: Do I think the stock market will be higher in 50 years or 20 years from now?
• 17:12
  SPEAKER_01: Yes.
• 17:12
  SPEAKER_01: Do I think it will be lower in 2, 3, 4, 5 years?
• 17:17
  SPEAKER_01: Probably.
• 17:18
  SPEAKER_01: You know?
• 17:18
  SPEAKER_01: It's not about the stock market or the bubble, it's about the company alphabet, and I think the company alphabet is going to be worth more in 5 or 10 years from now.
• 17:30
  SPEAKER_01: And it's a great business, it's a high-quality business, it has great management, it has it is founder-led, it has a great track record, it has products and services I use, I can keep track of it.
• 17:48
  SPEAKER_01: It's not that hard to understand.
• 17:52
  SPEAKER_01: Does it have a lot of uncertainty?
• 17:54
  SPEAKER_01: Yes, but that allows for opportunities and outsized returns compared to like owning an index fund.
• 18:01
  SPEAKER_01: So yeah, those are my thoughts.
• 18:05
  SPEAKER_00: Yeah, I think you've summed that up really nicely.
• 18:07
  SPEAKER_00: I think I would totally agree around those points.
• 18:10
  SPEAKER_00: Probably the share price is slightly suppressed in comparison to competitors or as peers because of that narrative around you know the breakup or Chat GPT potentially being the sort of the search killer.
• 18:24
  SPEAKER_00: I come away from this podcast feeling more confident.
• 18:28
  SPEAKER_00: I think the company has, if anything, more opportunity and and an opportunity to execute with with AI, to integrate that into its existing services.
• 18:39
  SPEAKER_00: It's you know, obviously it probably had the chance to be a pioneer back in 2017 off LLMs.
• 18:45
  SPEAKER_00: It is playing a bit of a catch up, but it has the skill that allows it to effectively overtake smaller, uh I say smaller with with sort of you know ear quotes, but you know, smaller competitors that you know have to rely on external funding.
• 19:01
  SPEAKER_00: Google can self-fund here, and it really looks like there's opportunity across different segments of the business, not just with an AI.
• 19:09
  SPEAKER_00: I have no doubt that AI will play a part, but across YouTube, across Google Cloud, the advertising stack will continue and hopefully you know search continues to grow at at double digits and growth.
• 19:24
  SPEAKER_00: So, and again, you know, we might be looking at a breakthrough in Waymo sooner than we think.
• 19:30
  SPEAKER_00: So, yeah, I would I would totally agree.
• 19:32
  SPEAKER_00: I think to your point, will Google be more valuable in in five or ten years?
• 19:38
  SPEAKER_00: Yes, I would say so.
• 19:40
  SPEAKER_00: Is it a good buy in this immediate moment?
• 19:43
  SPEAKER_00: It's not something that I would look to buy, but that's only because I think there'll be an opportunity to buy it at a cheaper price or top up at a cheaper price in the future.
• 19:53
  SPEAKER_00: I can't say when.
• 19:54
  SPEAKER_00: I'm not a not a fortune teller, but yeah, I think we've covered Google extensively in alphabet, and it leaves me as a shareholder more confident than when I started this process.
• 20:06
  SPEAKER_01: I mean, at the end of the day, it comes down to hurdle rate, right?
• 20:09
  SPEAKER_01: I think if you want a market-beating return, which is something you should strive for if you are investing in individual companies, do I think it will generate positive returns the coming five to ten years?
• 20:25
  SPEAKER_01: Yes, I think so.
• 20:27
  SPEAKER_01: Whether that be two, four, six, eight percent, I don't know.
• 20:30
  SPEAKER_01: And anyone that tells you that does know is lying to you.
• 20:33
  SPEAKER_01: But it comes down to a hurdle rate, and I'm looking for small in smaller companies, I'm looking for a hurder rate of about 15%.
• 20:41
  SPEAKER_01: For a company like Alphabet, it provides me a lot of stability in my portfolio, it gives me ease of mind.
• 20:50
  SPEAKER_01: It won't generate outsized returns.
• 20:53
  SPEAKER_01: Am I going to add if it drops 50% tomorrow?
• 20:57
  SPEAKER_01: Absolutely.
• 20:58
  SPEAKER_01: Do I think it has uh some of the strongest modes in the world?
• 21:02
  SPEAKER_01: Yes.
• 21:04
  SPEAKER_01: It is not without challenges.
• 21:05
  SPEAKER_01: I sound very biased, and uh I probably am, so do your own research.
• 21:10
  SPEAKER_01: I mean, the ongoing antitrust battles, the delicate dance with Apple, the existential threat and opportunity presented by the rise of generative AI and competitors like ChatGPT.
• 21:24
  SPEAKER_01: That means Google's future, while I believe it's bright, is not without hurdles or risk.
• 21:31
  SPEAKER_01: It comes down to execution, capital allocation, investing in RD, having a bit of luck.
• 21:37
  SPEAKER_01: Hopefully, the bubble bursts.
• 21:40
  SPEAKER_01: OpenAI goes broke, and Alphabet will reign supreme.
• 21:45
  SPEAKER_01: That would be my ideal story as an alphabet shareholder.
• 21:51
  SPEAKER_00: So I think that's a pretty nice point to wind up.
• 21:53
  SPEAKER_00: Have you got anything else you'd like to add?
• 21:56
  SPEAKER_01: Uh no, I I really enjoyed talking about Alphabet for over 90 minutes with you, and I appreciate you taking the time to talk to us, doing the research with us, sharing your opinions, your research with us, the listeners, and um I am excited to dive into a new, entirely new company or topic with you in a couple weeks.
• 22:22
  SPEAKER_01: So thanks, Sonny.
• 22:24
  SPEAKER_00: Thanks again for having me.
• 22:25
  SPEAKER_00: Always a pleasure to be on.
• 22:27
  SPEAKER_00: And if anyone ever wants to find me, you can find me at SecretSource Investing on SubStack.
• 22:33
  SPEAKER_01: Yes, I'll make sure to put the link in the description.
• 22:35
  SPEAKER_01: Definitely check him out on Substack.
• 22:38
  SPEAKER_01: Thank you for joining us, and uh, we've we hope you've gained some kind of fun or valuable insights from this episode.
• 22:45
  SPEAKER_01: And uh we'll see you next time.
• 22:47
  SPEAKER_01: Bye everybody.