“Google grew revenues by 19% in 2014 to US$66 bn, an astonishing rate for a large company. Its net income from continuing operations was US$13.9 bn compared to US$13.3 bn in the prior year, implying a more modest 4% growth. Continuing earnings exclude a gain from the sale of Motorola Mobile in 2014 and a loss from the sale of Motorola Home in 2013. E26The discontinuity between Google’s revenue and earnings growth is the main source of controversy amongst investors. There is agreement on its cause: precipitous growth in all operating costs, in particular research. R&D spend was US$6.1bn in 2012, US$7.1bn in 2013 and – wait for it – US$9.8bn 2014. The controversy is whether such a high level makes sense. The majority seem to think not. They view Google’s various research projects as flights of fancy of its Billionaire owners. Needless to say, I am in the minority. Frankly, it is a mystery to me why there is so much pessimism around Google’s capital allocation. Its track record is virtually blemishfree. YouTube, Android, Chrome, and Maps are just a few of its home runs. Recall the costs entailed by Baidu because it did not invest early in a mobile operating system and a video site. Even when projects do not work, the losses are relatively small. Furthermore, there is value and learning in trying to do new things. In “Work Rules!” Lazlo Bock, Google’s Head of HR, explains the importance of Google’s audacious projects best known as moon shots – if you want to get the best people, you have to set the most ambitious E26 challenges. Larry Page often says that he does not understand Wall Street’s concern that Google will spend too much on moon shots. His concern is finding sufficient opportunities to avoid spending too little. Given that Google has US$64 bn cash in the bank, this strikes me as the more legitimate concern. Larry goes on that he sees sufficient opportunity to deploy this capital if he surveys the company’s opportunity set. I find that reassuring, though no doubt it would be better for the share price development in the short run if he were to announce a big share buyback. Long term owners can be grateful that Larry and not Wall Street is calling the shots.”
Billionaire Andreas Halvorsen is even more bullish than RV Capital. Here is what Halvorsen said about the stock in his third quarter investor letter:
“Among long positions, Alphabet was the biggest winner, contributing 1.2% to both funds. Our core thesis revolves around the company’s transition from desktop to mobile. In our opinion, prevailing concerns around this transition are misguided and mobile represents a tremendous revenue opportunity. During the quarter, the stock price appreciated on strong earnings growth in support of our thesis. Pricing on mobile advertising improved, narrowing the gap to desktop ad pricing; YouTube views accelerated meaningfully; and desktop search continued to grow. We think that the secular shift of advertising dollars from traditional media to search and YouTube will drive substantial revenue growth going forward. Since cost growth is decelerating as a result of less aggressive hiring, we expect margins to expand. We believe that management, following the recent reorganization, is seeking incremental operating efficiencies and streamlining capital allocation. We find the current valuation compelling, especially in light of the company’s growing net cash position, and the likelihood that strong revenue growth combined with improved cost control will result in a higher price-to-earnings multiple.”
Now, we’re going to take a glance at the latest action surrounding Alphabet Inc (NASDAQ:GOOGL).
How are hedge funds trading Alphabet Inc (NASDAQ:GOOGL)?
At the end of the fourth quarter, a total of 154 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 19% from one quarter earlier. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
