Thursday, Oct 25th 2018

Over-reaction Despite Strong Results


When growth slows, so should a stock's valuation. But this is likely an over-reaction.

Alphabet (also known as Google) reported solid Q3 results. Sales grew +22% and earnings grew +36% versus last year. For such a massive company (almost $800B market cap), that is simply tremendous growth.

However, we believe investors overreacted on the sales "miss" versus their lofty expectations. They expected +23% growth, just a tad higher than what the company delivered.

When popular "FAANG" stocks like Google miss the quarterly expectations of investors, they often see drastic declines in price as the short-term traders sell and move their capital elsewhere. Weak-handed investors tend to extrapolate the quarterly results far into the future and become more bearish on the companies.

At Titan, on the other hand, we look at the company's fundamental sales and earnings growth on an absolute basis. Did the company just lose -5% of its intrinsic value as the stock price move suggests? We think not.

Google delivered earnings per share of $13.06 vs. estimates of $10.41. If you annualize those earnings (multiply by 4), that's $52 EPS. At the current after-hours price of $1040 per share, that means GOOG is now trading at only 20x P/E... on current earnings.

BUT, Google also has about $140 per share in cash just sitting in its coffers. Giving the company credit for that cash, its true share price is only $900. That means it's only valued at about $900 / $52 = 17x P/E ("ex cash"). Basically the same valuation as the S&P 500.

To be fair: when growth slows, so should a stock's valuation. Google's growth was "less good" than estimates, so those estimates need to come down going forward. So the stock may deserve to be down on these results.

However, Q3's results do not suggest a fundamental weakening in Google's moat. The valuation now appears attractive in our view.

Google doesn't provide future forecasts, but we're confident its many growth initiatives (mobile ads, YouTube, cloud services, "Other Bets") will continue to pay off in the long run.

As of this writing, GOOG was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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