Market Capitalization of Alphabet Inc.

Alphabet is the holding company founded in 2015 by acquisition and operation of different companies – the largest of which is Google. It operates through two segments: the Google and the other Bets. Google generate revenues primarily by delivering both performance advertising and brand advertising, and its core Internet products and platforms designed for work, email, time management, cloud storage, instant messaging and conferencing, mapping and navigation, video sharing, payment interface, web browser, and various other services. The other Bets are independent companies including early-stage businesses, and their revenues are primarily generated from internet access, self-driving cars, life sciences, and TV services, as well as licensing and R&D services.

In this financial analysis statement, Facebook has been chosen as a competitor of Google since both of their revenue has been generated mostly from advertising businesses.

As for ad revenue in 2019, Google amounted to almost 134.81 billion US dollars while Facebook generated close to 69.66 billion U.S. dollars. However, Google generates its advertising revenue by providing solutions to millions of companies to grow their businesses: “ads tools allow performance advertisers to create simple text-based ads that appear on Google properties and the properties of Google Network Members; helping brand advertisers deliver digital videos and other types of ads to specific audiences for their brand-building marketing campaigns.

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” Facebook ‘s advertising accounts for the vast majority of its revenue that “ads enable marketers to reach people based on a variety of factors including age, gender, location, interests, and behaviors.”It can be seen that the company profile of Alphabet (Google) and Facebook in the following table, Table-1.

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As of April 2020, the Market capitalization of Alphabet Inc and Facebook Inc was accounted for $838.48B and $488.22B, respectively. As for advertising revenue, Google gained $134.81B which was over 83% of Alphabet’s total revenue $161.86B while Facebook made $69.66B which was almost 98.5% of its total revenue %70.7B in 2019. Facebook is competing with Google and YouTube mainly in advertising and video as daily active users (DAUs) of google search has 5.6B users that was more than 3 times as compared to 1.66B users of Facebook although monthly active users (MAUs) of YouTube reached to 2B users which was slightly lower than 2.5B users of Facebook in 2019. It is significant that the size of Google is hugely larger than Facebook, but we need to analyze further more details by comparing of their financial statements to find out the strengths and risk factors of company. Financial statement analysis is important to analyze since it helps to identify problems and opportunities within a firm. The following section analyses financial performance of Alphabet, Inc by comparing with Facebook Inc using horizontal and vertical analysis and ratio analysis.

Ratios are calculated and analyzed based on the income statement, the balance sheet, to compare against historical performance of a firm and against those of its competitors so we can get a clearer vision from the results demonstrating the financial health, operational proficiency and earning capability of the firm over time. The operational performance of Google is mainly discussed through secondary data that is applied from the annual reports (10-K) released on S&P 500, of Alphabet Inc and as its competitor Facebook Inc for the fiscal year of 2019.According to financial statements of Alphabet & Facebook, it can be clearly seen that Alphabet is the bigger company than Facebook, thus, the following statements are described comparing Alphabet with Facebook based on a specific line item as 100% in each table. Both companies are analyzed and compared, based on Total Revenue in the income statement and based on Total Assets in the balance sheet. To analyze the trend of Alphabet (Google), the fiscal year of 2018 and 2019 is compared in each financial statement. (Refer to separately attached excel workbook for detailed calculations.)For the fiscal year ended December 31, 2019, key financial results of Alphabet and Facebook were shown as below.

Revenue: Google revenues in the FY of 2019 was 99.3% of the total revenue of Alphabet with revenue growth of 18% from the FY of 2018 while revenue from advertising was 83.3% that of total, approximately 16% increase from the FY of 2018, and so revenue from Google segment is the largest in Alphabet Inc, similarly, the majority of revenue comes from advertising (Google Search & other, YouTube ads, Google Network member’s properties) that hugely contributed to Google revenues. On the other hand, Facebook represented 98.5% from advertising of its total revenue in 2019 which was significantly increased by 27% from the FY of 2018. Comparing Google with Facebook for advertising revenue, the difference was about $65 billion and Google was 51.7% higher than Facebook.

Operating expenses: COGS for Alphabet was 44.4% of total revenue which was increased from 2018 due to an increase in data center and other operations costs, in addition, there was an increase in content acquisition costs for YouTube, while Facebook had much lower cost with 18% in 2019, but increased 37% compared to 2018 due to an increase in operational expenses related to data centers and technical infrastructure, as well as higher cost of consumer hardware devices sold and traffic acquisition costs. However, expense for SG & A and R&D as the percentage of total revenue, Facebook accounted for 28.8% and 19.2%, respectively while Alphabet represented for 17.3% and 16.0%. Thus, for the total percentage of operating expenses in the FY of 2019, Alphabet was 12.78% higher than Facebook, although Facebook spending in SG & A and R&D was larger than that of Alphabet. Net income: As we can see the figures, the size of Alphabet (Google) is significantly larger than Facebook, but as the percentage of total revenue in 2019, Facebook had shown 26.2% while Alphabet gained net income by 5% lower than Facebook that was mostly due to the higher cost of revenue.

Assets: 2019 compared to 2018, current assets and non-current assets of Alphabet increased by 12% due to cash increase from advertising revenue, cash equivalents, and marketable securities and 27% in terms of continued investment in property, plant and equipment and other long-term assets although the amount of current assets was more than long-term assets in both FY. While Facebook had nearly 50% of current assets which consist mostly of cash on deposit with banks, investments in money market funds, and investments in U.S. government securities, U.S. government agency securities, and corporate debt securities that almost as the same percentage as long-term assets in 2019. It is interesting to note that Facebook represented for 14.7% in Goodwill and intangible assets of its total assets as they purchased certain intangible assets and completed several business acquisitions that were not material during the FY of 2019 while Alphabet described goodwill as only 8.2% recorded in the Google segment.

Inventory: Inventory for hardware that Google sells in 2019 was dropped by 10% as compared to 2018 while there was no inventory for Facebook. Liabilities: As for Alphabet, total current liabilities against total current assets, the percentage amount was significantly lower in both FY 2018-2019. However, both current and non-current liabilities was risen by 31% and 42% from 2018. Total liabilities for both Alphabet and Facebook were more than 24% in 2019, and Alphabet had more current liabilities than long-term, with 5.8% higher, on the other hand, Facebook showed more non-current liabilities, with just 1.7% higher than its current liabilities. In retained earnings and shareholder equity for Alphabet, there had been an increase by 13% from 2018 along with net income increased by 12% in the income statement. With its strong revenue and cash positions, it may lead to company’s growth by internally generating funds rather than using debt financing.

Profitability ratios based on each company’s Gross profit, Operating Income and Net income in 2019 shows that Alphabet’s net profit margin and gross margin was slightly decreased despite of increasing operating margin. Facebook compared to Alphabet (Google segment); Profitability ratios were notably better in 2019. Although Alphabet’s Liquidity ratios were lower than Facebook, as we can see the figures of current assets in balance sheet showed that Alphabet can quickly pay off its current debt obligations without raising external capital.In 2019, even though asset efficiency ratios of Alphabet were just lower than 2018, and asset turnover ratio of both companies were under 1, as compare to Facebook, Alphabet can turn over its assets at a faster rate than Facebook, specifically more efficiently using its fixed assets.Alphabet had a better working capital ratio except receivables turnover in 2019 comparing with 2018, but its collection of accounts receivables from clients was slightly slower than previous year. A very high interest coverage ratios of both companies showed that they can easily pay interest on their outstanding debts. Leverage ratios of both companies was increased significantly in 2019 however they can still cover the interest on its debt because of high operating returns.

Operating returns based on each company’s Net income and EBI during 2019 also reveals that Facebook can generate a better rate of return by utilizing its assets and equity.1. Your analysis what company is doing right and what it could do better.Google’s success is generating money from internet advertising by providing search engine for free of charge to users and it gains the market share of global internet search, with over 90%. As for mobile terminal OS, 3 out of 4 smartphones in the world are Android. Video advertising has become a major trend in recent years. Before that, the decision to acquire YouTube to allow ads to be delivered to videos and it became the most watched video site in the world, with 2 billion users. Similarly, Chrome has a majority of global market share in the browser as well, with 64%. With the number of Internet users in the world increases, Google have an opportunity to generate more and more revenues. As a result of providing different Google services and increasing numbers of users using smartphones, advertisers also have to choose AdWords (Google’s advertising service) to attract customers online.Nowadays, Google has a huge opportunity by developing a technology called AR that combines CG with real-time video, it could lead to Google to be able to jump out of the screen of devices and place advertisements. ‘Google will move from mobile-first to AI-first world, smartphones, wearables (watches, earphones, etc.), automobiles, and homes will be made smarter with AI in four fields,’ CEO Pichai declared.

Although, Google is left behind on smartphone and cloud technology compared to other tech giants, it is anticipated that Google will be ready to the next boom.Google reorganized as a holding company, Alphabet Inc in 2015 to focus on running diverse businesses independently with the goal of maximizing each of the business’ potential, but reorganization failed from the viewpoint of total revenue as Google still generates 99% of Alphabet’s total revenue. Therefore, investing significant resources in Alphabet’s unprofitable projects should have shut down and other businesses should have become under Google’s management.2. How it can enhance share valueIn order to attract investors and enhance share value, company should consider about more capital returns, more focus on cutting expenses and greater transparency and leadership.

Firstly, it should expand share buyback. The company made a $ 5.7 billion share buyback in Q3 2019 that was more than double the $2.2 billion in the year-ago quarter, but the pace of expansion should rise further. Looking at the change in the number of issued shares over the past year, it was less than 1% in Alphabet. Since 2015, the number of issued shares has increased by 1% when Alphabet started buying back shares, as a result of stock compensation to employees by issuing new shares offset the decline in the number of issued shares due to share buybacks. It can continue to buy back more than $30 billion of stock annually without compromising its net cash balance for growth.Secondly, Alphabet should also consider dividends. Apple and Microsoft (MSFT) have a dividend yield of 1% over the past year. It is possible to set an upper limit on the amount of cash on hand held at the current level and promise to return all free cash flow to shareholders. Furthermore, the operating margin of total profits was 24% in the third quarter of 2019, down from 26.5% in the first quarter of 2017 due to significant increase in costs, with 75% increase in the number of employees. Compared to Facebook with profit margins of over 40% that use a advertising business model, suggesting that Alphabet can also improve profit margins from advertising as well.

Finally, Alphabet need to improve transparency because it does not disclose much detail about Other Bets segment. Investors are particularly eager to disclose revenue and profits from the Google segment. Changing leadership of company could enhance share value as well, for example, CEO of Google, Sundar Pichai was promoted as CEO of Alphabet. 3. key recommendations for enhancing business efficiencies.Since 2017, Alphabet have been aggressively investing in a variety of fields, so the net income to sales ratio used to be around 30%, but in the last few years it has fallen to the first half of 20%. It can be seen that the cash flow also peaked in 2017 and has declined. The problem is that the increase in profit margin has not kept up with the increase in sales due to the rapid increase in spending. According to DuPont analysis, Net income to EBT ratio, the tax burden was slightly dropped from 0.88 in 2018 to 0.87 in 2019 while interest coverage ratio and asset turnover ratio was as same as previous year. Comparing 2018 with 2019, as for EBIT to sales ratio, it was marginally lower than 2018 while Equity multiplier was increased from 1.31 to 1.37. However, as compared to its competitor Facebook, Google’s operating efficiency was notably lower and equity multiplier was higher, resulted in 1.2% lower in ROE.

Therefore, Alphabet would need to increase its profit margin by 6% in order to match Facebook’s ROE. Cost of goods sold and operating expenses of Alphabet was notable to its total revenue that affect its net profit margin, and so company should increase its operating efficiency by generating higher sales in advertising or reducing operational expenses related to data centers and technical infrastructure, as well as cost of consumer hardware devices sold and traffic acquisition costs. Under Alphabet, there are more than 200 smaller companies as of 2019 including unprofitable businesses, hence, company should re-consider about its merger and acquisition strategy and stop investing incredible amount of resources in unforeseeable businesses which might cause uncertainties about roadmap of the business itself even though long-term planning projects are important for sustainable growth.

How global factors affect company and how it can tackle them?Google international revenues accounted for approximately 54% of consolidated revenues in 2019. The global factors that can arise from the expansion of international operations affect the company that could harm its financial condition, and operating results. The following factors should be considered as risks for company with its expansion. “Intense competition, for example, the rise of social media usage strengthens its competitor like Facebook and other state-sponsored online companies like in China. Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent from repatriating cash earned in countries outside the U.S. Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent from offering products or providing services to a particular market and may increase operating costs. Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud. Still developing foreign laws and legal systems. Uncertainty regarding liability for services and content, including uncertainty as a result of local laws and lack of legal precedent.

Different employee/employer relationships, existence of workers’ councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions. Changes in international local political, economic, regulatory, tax, social, and labor conditions can increase operations cost.” Therefore, to keep competitive, company must continue to invest in research and development, including through acquisitions, in order to enhance existing and introduce new products and services. Moreover, it is important to improve its services to match individual preferences and the mobile-friendliness of its online products as the demand for online advertising increases with growing internet access, rapid adoption of mobile devices in the global market and the increasing diversity of users.To control foreign exchange currency risks and credit risks, company should properly manage through foreign exchange risk management program, and master sales agreement as well as risk insurance.

Regarding provision for income taxes and other tax liabilities, it must regularly review and audit by both domestic and foreign tax authorities as well as reasonable estimates must be recorded. To comply with laws and regulations and legal rights of different countries, it must implement updated policies and procedures, so the company can improve its privacy measures and develop innovative measures and ensure that all their employees, contractors, or agents are align with its policies. Also, it must seek to maintain certain intellectual property as trade secrets. and obtain adequate patent or copyright protection for certain innovations. It is also required to concern about data protection and localization laws according to respective countries, so it must continue to expend significant resources to create world class security, and notify to users when there is a security breach for personal data, and properly store and/or process certain types of data.

Moreover, it must continue to cooperate with the European Commission and other regulatory authorities around the world in investigations they are conducting with respect to company business. Moreover, company need to integrate operations across different cultures and languages by thoroughly observing on social factors in one’s country will help to reduce conflicts between people come from different backgrounds. As continuous investment in international operations, company should choose some geographical areas that is likely to have the stable political climate and economic stability can minimize obstacles for the firm’s expansion. It can help not only to cut costs or diversify its businesses which is not solely reliant on one segment or geographic region, but also to mitigate risks.

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Market Capitalization of Alphabet Inc.. (2021, Oct 15). Retrieved from

Market Capitalization of Alphabet Inc.

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