Monday's Value Investing Digest
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett
5/15/2023 - Monday
Hello, and Welcome to Value Vultures!
Todays Value
Book Review
Company Breakdown
Investor Spotlight
Tip of the Day
Warren Wisdom
Book Review
“Security Analysis" by Benjamin Graham and David Dodd
First published in 1934, is a comprehensive guide to the valuation of securities, authored by the pioneers of value investing, Benjamin Graham and David Dodd. Widely regarded as the investment bible, it has stood the test of time and remains an essential resource for understanding the fundamentals of value investing.
The book is divided into several sections, each focusing on different types of investments such as bonds, preferred stocks, and common stocks. It's packed with concepts and methodologies that form the bedrock of a value-oriented approach, emphasizing investing for the long term, focusing on intrinsic value, and margin of safety.
Key Takeaways:
Intrinsic Value: The book introduces the concept of intrinsic value - the real worth of a company, which may not always align with the current market price. Graham and Dodd advocate for investing in companies when their market price is significantly below their intrinsic value.
Margin of Safety: This principle suggests that one should only invest in a security when its market price is significantly below its intrinsic value, providing a "margin of safety" against potential losses.
Mr. Market: Graham and Dodd portray the market as a manic-depressive character who offers securities at prices that often don't align with their intrinsic value. This analogy teaches investors not to be swayed by market fluctuations but to take advantage of them.
Fundamental Analysis: The book emphasizes the importance of thorough analysis of a company's financial statements to understand its true financial health and long-term prospects.
Why Read It:
While the book might seem daunting due to its depth and technicality, it is worth reading for anyone serious about investing. The concepts are timeless and provide a solid foundation for making investment decisions. Despite being nearly a century old, the wisdom contained in "Security Analysis" is just as relevant in today's market as it was when it was first written.
Is it Time to buy GOOGLE?
Ticker: GOOGL
Price: $117
P/E Ratio: 26.53
Mkt cap: 1.50T
Summary:
Google, a subsidiary of Alphabet Inc., is an American multinational technology company specializing in Internet-related services and products. Founded in 1998 by Larry Page and Sergey Brin while they were Ph.D. students at Stanford University, it has grown to become one of the world's most valuable and influential companies.
Google's initial and most well-known product is its search engine, but its services have since expanded to include online advertising technologies, cloud computing, software, and hardware. Some of its other popular services include Gmail, Google Docs, Google Drive, Google Maps, Google Photos, and YouTube, among others.
Revenue Model
The vast majority of Google's revenue, around 80% comes from advertising. Google has two main advertising platforms: Google Search, where ads are displayed in search results, and Google Network Members' websites, which are part of the Google Display Network and AdMob Network.
Here's a brief explanation of both:
Google Search Advertising: Businesses pay Google to have their ads displayed alongside search results when users search for particular keywords. This is facilitated through Google's advertising service called Google Ads (formerly AdWords).
Google Display and AdMob Network: Google partners with millions of websites and apps (network members) where it displays ads. These network members get a share of the revenue generated when these ads are viewed or clicked.
In addition to advertising, Google also earns revenue from other sources such as:
Google Cloud: A suite of cloud computing services, much like Amazon Web Services and Microsoft Azure.
Google Play: A digital distribution service for applications, games, music, and movies.
Hardware: Google sells hardware products like Google Pixel phones, Nest home devices, and Google Home speakers.
YouTube Premium and YouTube Music subscriptions: Ad-free and premium content services on YouTube.
Despite its diverse portfolio, advertising remains Google's primary revenue source, underscoring its dominance in the digital advertising market.
The Opportunity
There has been a recent 20% drop in Google's (GOOG) stock since June 2022 due to factors like higher interest rates and a slowing ad market, with organic growth dropping from 32% y/y to 1% y/y. This slowdown is industry-wide, affecting other major players as well.
Activist investors like TCI have pressured Google to exercise better cost control, leading the company to make unprecedented moves to become leaner and cut costs, such as layoffs and reducing office space.
The rise of ChatGPT and Microsoft’s swift adoption of it have generated a lot of hype, causing a knee-jerk reaction in the market and a 13% drop in Google's stock. We believe this reaction is overblown and that Google is well-positioned to respond to AI threats, given its long and successful history with AI.
Google's experiences with AI include notable milestones such as acquiring Deepmind in 2014, using it to reduce data center energy usage by 15%, and solving complex biology problems like protein folding. AI has also been incorporated into various Google products like predictive search, Gmail auto responses, and Google Translate.
We believe that AI is not going to destroy the search business but will likely be incorporated into search or word processors.
There are also ongoing antitrust cases against Google, which could result in changes to Google's behavior or even a company breakup. However, this could be a potential upside, as past breakups in major antitrust actions have created value for shareholders.
Despite the challenges, Google will continue to improve its products and services. In an AI-first world, we see Google as a major player, providing solutions to companies for their toughest problems.
As of right now Google can be purchased at 17x its 2023 EPS, a discount to the market multiple, which is seen as a fair price. We believe the online ad market still has significant growth potential and is optimistic about Google's future prospects.
If you would like to read more check out the full article here
Credit to buggs1815
Investor Spotlight
Benjamin Graham (1894-1976) was a British-born American economist, professor, and investor, widely recognized as the "father of value investing". His work laid the groundwork for much of the modern security analysis used in finance today.
Graham co-authored the seminal book "Security Analysis" with David Dodd in 1934, providing a systematic approach to evaluating the intrinsic value of securities. He later wrote "The Intelligent Investor" in 1949, a book Warren Buffett describes as the "best book about investing ever written".
Graham's investment philosophy emphasized investor psychology, minimal debt, buy-and-hold investing, fundamental analysis, concentrated diversification, and the margin of safety.
Graham had notable students who went on to become successful investors, the most famous being Warren Buffett. Despite his passing in 1976, Graham's influence on investment theory and practice continues to be significant.
Investing Tips
One of Benjamin Graham's most famous investing tips is the concept of the "Margin of Safety."
The Margin of Safety principle advises investors to only buy securities when their market price is significantly below their intrinsic value. In other words, a company's stock should be purchased for less than what it is really worth, based on fundamental analysis. This gap between price and value provides a safety buffer, or "margin of safety," which can protect investors from poor decisions, unexpected events, or market downturns.
Graham believed this principle to be the cornerstone of any sound investment strategy and a key to minimizing potential losses. It encourages investors to focus on risk as much as potential reward, which is a key aspect of value investing.
Warren Buffett Wisdom
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