Making the Right Investment

Alphabet Inc is a U.S company providing online advertising services throughout the country and internationally. The company was founded in 1998 and operates through Google as well as other bets segments to offer performance and advertising services. The Google segment has internet products, technical infrastructure and other newer efforts that include virtual reality. Additionally, the segment offers digital content hardware products, enterprise cloud services and other miscellaneous products and services. Other bets segment incorporates businesses like Calico, Access, CapitalG Nets, GV, Verily, Waymo and fiber internet and TV services. 

Business Strategy Analysis 

Alphabet subsidiary Google is known for its culture of creativity as well as innovative approaches for new product development. The company offers a wide range of interrelated internet products and services that meet personal and professional needs of the customer for communication, organization, recreation and enhancing the level of performance as well as effectiveness. Initially, the company operated as Google Inc but was restructured in 2015 thus becoming Alphabet Inc which is a holding company but lacking business operations of its own. The company has reported a 24% year over year constant currency revenue growth. In 2016 the revenues for the company were $90.3 billion where revenue growth of 20% year over year was reported. 

The core business strategy for the company is diversification as well as the introduction of new products and services. Similarly, the company uses differentiation by engaging in a broad market scope and offering products to individual and corporate all over the world. The high number of products indicates the company’s innovation in differentiation generic strategy. The business strategy is based on developing a closed ecosystem that motivates customers to continue using a wider range of products as well as services. The company also uses acquisition business strategy to expand its operations. Alphabet marketing strategy uses different online as well as offline marketing techniques focusing on product elements, targeting the largest customer segment using different products and services and incorporating unique elements of marketing communication mix. The company relies on intensive strategies to penetrate into the international market. Growth is driven by market development intensive strategy. Differentiation has led to the leadership position of the company (Oberstein, 2016). Similarly, intensive growth strategies that include market penetration, as well as development and product development, also contribute to the capacity of the company to maintain a leadership position. 

Accounting Analysis 

The accounting practices of the company reflect an accurate picture of the economy. The company is one of the best performing globally and its ability to exploit online products and services has continued to drive its growth. The ability to acquire new businesses and expand operations to new markets shows that the company has a strong assets base and capital that allows its global expansion. The cash flows from the company are not affected by the expensive and capital intensive expenditures in established global companies with operations in different countries. 

The financial statements of the company including form 8 K shows that there are no significant changes that took place in the company requiring amendments to the financial statements presented earlier. One notable event that needs to be assessed is the recasting of the financial statements of the company in 2016. The company had to amend the 2015 form 10 K following its adoption of the Accounting Standards update 2014-10 on Development Stage Entities, elimination of financial reporting requirements which include an amendment to variable interest entities guidance. Other areas included consolidation, amendment of the consolidation analysis, compensation and improvements to employee share-based accounting which was to take effect from January 2016. ASU 2014-10 deals with the definition of development stage entities as well as other reporting entities. Alphabet adopted the standard retrospectively and included additional disclosure on certain entities considered variable interest entities when it is adopted. 

According to ASU 2015-02, an entity must conduct an analysis to establish whether to consolidate some legal entities. Alphabet also adopted the provisions retrospectively which led to the consideration of additional investment as variable interest entities. ASU 2016-09 amended different aspects of accounting for share-based payment transactions requiring companies to show excess tax benefits as operating activities while preparing the statement of cash flows as well as other changes. The company has retrospectively made the necessary adjustments in presenting its excess tax benefits in the consolidated statement of cash flows. The company had to recast the information relating to these areas in an exhibit which was attached to form 8-K to reflect the impact of adopting the above provisions. The information superseded the information reported in item 7 and 8 of the financial year 2015 form 10-K. The provisions of from 8-K did not amend or restate the form 10-K for the financial year 2015 but the two should be read together. 

The auditor's report in the financial statements also indicates that the financial statements of the company reflect a true and fair view of its operations. The amendments to the financial statements were not done to correct the presented financial statements but to indicate changes in the accounting practices and treatment of some of the provision. The financial statements can, therefore, be relied upon and the auditor report gives confidence on the financial performance of the company and its potential as an investment option. Based on the presentation of the financial statements as reflecting a true and fair view of the company and its economic conditions, the financial statements offer the first reference point for investment decision and whether to continue with the analysis or not. 

Financial Analysis 

This section analyses and evaluates the financial ratios of the company as well as its cash flow measures relative to historical performance. The analysis will use four-year historical data to determine the trend and the performance of the company. This section will offer a clear indication to continue with further analysis and ultimately to invest in Alphabet Inc. According to the financial statements for the company for the years 2015, 2016 and 2017, the revenues for the company were $74,989,000, $90,272,000 and $110,855,000. These figures indicate a 20% increase in 2016 from the previous year and 23% growth in 2017 from 2017. the gross profits have continued to record impressive growth from $46,825,000 recorded in 2015 to $55,134,000 in 2016 and $65,272,000 reported in 2017 such changes indicate an 18% increase in 2016 and 2017 from the previous year. The operating income for the company in the three consecutive years was $19,360,000, $23,716,000 and $26,146,000 respectively indicating a 23% and 10% increase in 2016 and 2017 respectively. The net income from continuing operations was $16,348,000, $19,478,000 and 12,662,000 from 2015 to 2017 a significant change of 19% in 2016 and decline of 35% in 2017. The net income was 16,348,000, $19,478,000 and $12,662,000 over the three years respectively which shows an increase of 19% in 2016 and a decline of 35% in 2017. The net income applicable to common shares was $15,826,000, $19,478,000 and $12,662,000 which is an increase of 23% in 2016 and a decline of 35% in 2017. 

Alphabet Inc., adjustment to Net Income
USD $ in millions
12 months ended	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
Net income (as reported)	12,662	19,478	16,348	14,444
Add: Net change in available-for-sale investments, net of tax effect	412	-93	-507	371
Net income (adjusted)	13,074	19,385	15,841	14,815

The following table shows adjusted net profit margin 

Alphabet Inc., Adjusted Net Profit Margin
	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
As Reported
Net income (USD $ in millions)	12,662	19,478	16,348	14,444
Revenues (USD $ in millions)	110,855	90,272	74,989	66,001
Net profit margin	11.42%	21.58%	21.80%	21.88%
Adjusted: Mark to Market Available-for-sale Securities
Adjusted net income (USD $ in millions)	13,074	19,385	15,841	14,815
Revenues (USD $ in millions)	110,855	90,272	74,989	66,001
The adjusted net profit margin	11.79%	21.47%	21.12%	22.45%

The total current assets for the company in the three years from 2015-2017 was 90,114,000, $105,408,000 and $124,308,000. The figures indicate an increase of 17% in 2016 and 18% in 2017. The total assets for the company in the same period were $147,461,000, $167,497,000 and $197,295,000 representing a 14% and 18% increase in 2016 and 2017 respectively. The total current liabilities as reported in the company’s balance sheet for the three years were $19,310,000, $16,756,000 and $24,183,000. The figures indicate a reduction of 13% in 2016 from the previous year and a 44% increase in 2017 from 2016. The total liabilities were $27,130,000, $28,461,000 and $44,793,000 showing an increase of 5% in 2016 from 2015 and 57% in 2017. The net tangible assets as reported in the balance sheet were $100,615,000, $119,261,000 and $133,063,000 indicating an increase of 19% and 12% in 2016 and 2017 respectively. The common stock for the company in the three years under review was $32,982,000, $36,307,000 and $40,247,000 a 10% and 11% increase in 2016 and 2017. Total stockholder equity for the company in the three years was $120,331,000, $139,036,000 and $152,502,000 showing an increase of 16% and 10% in 2016 and 2017 respectively. The retained earnings were $89,223,000, $105,131,000 and $113,247,000 which is equivalent to 18% and 8% in the two years under review. 

The total cash flow from operating activities for 2015 to 2017 was $26,572,000, $36,036,000 and $37,091,000 which is an increase of 36% in 2016 from the previous year and a 3% increase in 2017. The total cash flows from investing activities was -$23,711,000, -31,165,000 and -31,401,000 in 2015, 2016 and 2017 respectively. The figures indicate an increase in expenditure on investment of 31% in 2016 and 1% in 2017. The cash flows from financing activities for the three years were -$4,225,000, -$8,332,000 and -$8,298,000 which is equivalent to 97% increase in 2016 and a decline of 0.4% in 2017. The changes in cash and cash equivalents for the period were -$1,798,000, -3,631,000 and -$2,203,000 showing an increase of 102% and a decline of -39% in 2017. 

Summary of the Financials 

Financials
	2015-12	2016-12	2017-12	TTM
Revenue USD Mil	74,989	90,272	110,855	117,251
Gross Margin %	62.4	61.1	58.9	58
Operating Income USD Mil	19,360	23,716	28,882	29,315
Operating Margin %	25.8	26.3	26.1	25
Net Income USD Mil	16,348	19,478	12,662	16,637
Earnings Per Share USD	22.84	27.85	18	23.6

Dividends USD
Payout Ratio % *
Shares Mil	693	699	704	704
Book Value Per Share * USD	169.12	193.99	226.11	231.55
Operating Cash Flow USD Mil	26,024	36,036	37,091	39,185
Cap Spending USD Mil	-9,915	-10,212	-13,184	-17,975
Free Cash Flow USD Mil	16,109	25,824	23,907	21,210
Free Cash Flow Per Share * USD	21.15	33.65	34.57
Working Capital USD Mil	70,804	88,652	100,125

Ratio Analysis 

Profitability
Margins % of Sales	2015-12	2016-12	2017-12	TTM
Revenue	100	100	100	100
COGS	37.56	38.92	41.12	42.01
Gross Margin	62.44	61.08	58.88	57.99
SG&A	20.25	19.35	17.83	17.88
R&D	16.38	15.45	15	15.11
Other
Operating Margin	25.82	26.27	26.05	25
Net Int Inc & Other	0.39	0.48	-1.52	1.37
EBIT Margin	26.21	26.75	24.53	26.37

Profitability	2015-12	2016-12	2017-12	TTM
Tax Rate %	16.81	19.35	53.44	46.19
Net Margin %	21.1	21.58	11.42	14.19
Asset Turnover (Average)	0.54	0.57	0.61	0.62
Return on Assets %	11.36	12.37	6.94	8.76
Financial Leverage (Average)	1.23	1.2	1.29	1.29
Return on Equity %	14.08	15.02	8.69	10.88
Return on Invested Capital %	12.82	14.02	7.98	9.93
Interest Coverage	189.95	195.76	250.48	272.2

Growth
	2015-12	2016-12	2017-12
Revenue %
Year over Year	13.62	20.38	22.8
3-Year Average	14.33	14.7	18.87
5-Year Average	20.66	18.95	17.18
10-Year Average	28.44	23.88	20.92
Operating Income %
Year over Year	17.36	22.5	21.78
3-Year Average	14.91	19.3	20.53
5-Year Average	13.27	15.1	17.75
10-Year Average	25.38	20.92	18.97
Net Income %
Year over Year	13.18	19.15	-34.99
3-Year Average	15.04	14.66	-4.29
5-Year Average	13.96	14.87	3.35
10-Year Average	27.28	20.26	11.66
EPS %
Year over Year	8.66	21.94	-35.37
3-Year Average	12.2	13.43	-5.04
5-Year Average	11.64	13.33	2.17
10-Year Average	24.7	18.8	10.47
Cash Flow
Cash Flow Ratios	2015-12	2016-12	2017-12
Operating Cash Flow Growth % YOY	0.16	0.38	0.03
Free Cash Flow Growth % YOY	0.41	0.6	-0.07
Cap-Ex as a % of Sales	13.22	11.31	11.89
Free Cash Flow/Sales %	21.48	28.61	21.57
Free Cash Flow/Net Income	0.99	1.33	1.89
Financial Health
Balance Sheet Items (in %)	2015-12	2016-12	2017-12
Cash & Short-Term Investments	49.55	51.54	51.63
Accounts Receivable	9.43	8.5	9.48
Inventory		0.16	0.38
Other Current Assets	2.13	2.73	1.51
Total Current Assets	61.11	62.93	63.01
Net PP&E	19.68	20.44	21.48
Intangibles	13.37	11.81	9.85
Other Long-Term Assets	5.84	4.82	5.66
Total Assets	100	100	100
Accounts Payable	1.31	1.22	1.59
Short-Term Debt	2.03
Taxes Payable	0.2	0.33	0.45
Accrued Liabilities	4.81	2.51	2.77
Other Short-Term Liabilities	4.73	5.95	7.45
Total Current Liabilities	13.09	10	12.26
Long-Term Debt	1.35	2.35	2
Other Long-Term Liabilities	3.95	4.64	8.45
Total Liabilities	18.4	16.99	22.7
Total Stockholders' Equity	81.6	83.01	77.3
Total Liabilities & Equity	100	100	100

Liquidity/Financial Health	2015-12	2016-12	2017-12	Latest Qtr
Current Ratio	4.67	6.29	5.14	4.87
Quick Ratio	4.5	6	4.98	4.71
Financial Leverage	1.23	1.2	1.29	1.29
Debt/Equity	0.02	0.03	0.02	0.02

Key Ratios -> Efficiency Ratios
Efficiency	2015-12	2016-12	2017-12	TTM
Days Sales Outstanding	50.96	51.94	53.46	46.21
Days Inventory		2.78	4.07	3.39
Payables Period	23.63	20.63	20.73	21.61
Cash Conversion Cycle		34.1	36.8	28
Receivables Turnover	7.16	7.03	6.83	7.9
Inventory Turnover		131.11	89.64	107.54
Fixed Assets Turnover	2.84	2.85	2.89	2.77
Asset Turnover	0.54	0.57	0.61	0.62

Summary of the Ratios and Margins of Alphabet Inc 

The following Information was obtained from the Wall Street Journal 

Profitability		Liquidity
Gross Margin	58.94	Current Ratio	5.14
Operating Margin	26.17	Quick Ratio	5.11
Pretax Margin	24.49	Cash Ratio	4.21
Net Margin	11.4	Efficiency
Return on Assets	6.94	Revenue/Employee	1,385,894
Return on Equity	8.69	Income Per Employee	158,058
Return on Total Capital	8.46	Receivables Turnover	6.74
Return on Invested Capital	8.46	Total Asset Turnover	0.61
Valuation		Capital Structure
P/E Ratio (TTM)	50.26	Total Debt to Total Equity		2.6
P/E Ratio (including extraordinary items)	50.19	Total Debt to Total Capital		2.54
Price to Sales Ratio	6.68	Total Debt to Total Assets		2.01
Price to Book Ratio	4.8	Interest Coverage		185.04
Price to Cash Flow Ratio	19.98	Long-term debt to equity		2.6
Enterprise Value to EBITDA	19.66	Long-term debt to total capital		2.54
Enterprise Value to Sales	6	Long-term debt to assets		0.02
Total Debt to Enterprise Value	0.01
Total Debt to EBITDA	0.11
EPS (recurring)	20.84
EPS (basic)	18.27
EPS (diluted)	18

From the above ratios, the company shows impressive performance in its profitability, liquidity, efficiency, valuation and capital structure. Most of the ratios are above the industry performance or close competitors. It shows that the company not only uses its assets to generate income but also employs such assets in the most efficient way. The company also has low debts which makes it less risky compared to a highly geared organization. The analysis of the different ratios also shows that the differentiation strategy employed by the company is proving to be beneficial to its shareholders by creating high returns. 

Investment by the Company 

Alphabet invests its excess cash in debt securities some of which is from the U.S government, agencies, corporate debt securities, money market and other funds, mortgage-backed securities, municipal securities, asset-backed securities, time deposits and debt instrument issued from foreign governments. The company classifies its investments as cash equivalents or marketable securities depending on their maturity. The classification is done at the time of purchase and re-evaluations are done at the balance sheet date. The company has classified as well as accounted for the marketable security as available for sale. Alphabet considers the risk versus reward objectives and the liquidity requirements to determine whether to sell the securities before they mature or not. The company classifies liquid securities that mature after 12 months as current assets under marketable securities in the balance sheet. Such securities are carried at fair value reporting the unrealized gains and losses fewer taxes as part of stockholders equity. Unrealized losses which are not temporary are recorded within other incomes as an expense. The company determines realized gains or losses from the sale of marketable securities using a unique identification method and are recorded as components of other income or expenses. 

The company accounts for nonmarketable equity investments using either equity or cost method. Any investments where the company has significant influence but cannot control the investee are accounted for under cost method. Nonmarketable investments are classified as noncurrent assets in the balance sheet for lack of a stated contractual maturity date. The company accounts for nonmarketable investments that fall under debt securities as available for sale securities. The following table shows adjusted income as available for sale investments for four consecutive years 

The following table shows adjusted ratios for the company for available for sale securities 

Alphabet Inc., adjusted ratios
	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
Net Profit Margin
The reported net profit margin	11.42%	21.58%	21.80%	21.88%
The adjusted net profit margin	11.79%	21.47%	21.12%	22.45%
Return on Equity (ROE)
Reported ROE	8.30%	14.01%	13.59%	13.82%
Adjusted ROE	8.57%	13.94%	13.16%	14.18%
Return on Assets (ROA)
Reported ROA	6.42%	11.63%	11.09%	11.01%
Adjusted ROA	6.63%	11.57%	10.74%	11.30%

Prospective Analysis 

The projected financial information is made on the assumption that the prevailing economic conditions and the current performance will be maintained by the company. Similarly, it is anticipated that no extraordinary event will take place in the course of business operations. The forecast will be useful in planning future returns on the investment and will also support decision making as to whether to invest in the company or not. According to CNN Money (2018), the sales for the company are expected to by 11.25% in the year 2018 and 2018. Similarly, the earnings will report the same growth rate of 11.25%. Earnings per share are expected to decline in 2018 before reporting an increase in 2019. 4-Traders (2018) project that net margin and operating margin for the company will continue experiencing 21.34% and 24.35% growth from 2018 to 2020. Net income will increase in 2018 by 22.98% before reporting a slight decline in 2019 to 20.99% and then an increase in 2020 at 21.34. Operating profits in the three years is estimated to be 32,853, 39,202 and 45,744 in 2018, 2019 and 2020 respectively. Net income for the period will be 31,282, 33,763 and 40,095. The price-earnings ratio is projected to be 26.7, 24.9 and 21.2 whereas the earnings per share will be 44.2, 47.4 and 55.7. Sales are projected to continue growing at a higher rate than the finance or debt and the earnings before interest and tax are also likely to grow at a similar rate. Leverage is projected to remain constant in the three years. Operating margin is expected to grow at 24% whereas operating leverage will report 1.13x current values. The net margin will be 21% and the return on assets is projected to grow at 15%. The return on equity will by 18% for the projected period. 

Based on the strategy of the company and financial performance, it is worth investing in its stock. Similarly, the financial analysis shows that the company can be relied upon to generate impressive returns for the investors. Similarly, the financial projections also indicate that the company will report impressive growth into the period under projection. It is expected that the company will generate high returns due to its current performance and fundamentals that make it a good investment option. 

References 

Alphabet Inc. (GOOG) | Investments. (2018). Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Alphabet-Inc/Analysis/Investments 

Alphabet Inc. (GOOG). (2018). Retrieved from https://finance.yahoo.com/quote/GOOG/key-statistics?p=GOOG 

Alphabet Investor Relations. (2018). Annual report form 10-K. Retrieved from https://abc.xyz/investor/ 

CNN Money, (2018). Alphabet Inc Forecast - CNNMoney.com. Retrieved from http://money.cnn.com/quote/forecast/forecast.html?symb=GOOG 

Google Inc : Financials, earnings estimates and forecasts for Google Inc | GOOGL | 4-Traders. (2018). Retrieved from http://www.4-traders.com/GOOGLE-INC-9469/financials/ 

Oberstein, M. (2016) “Google’s Success: 3 Winning Brand Marketing Strategies You Can Emulate”  Rank Ranger,  Available at: https://www.rankranger.com/blog/google-marketing-strategy 

WallstreetJournal, (2018). GOOGL Financial Statements - Alphabet Inc. Cl A - Wall Street Journal. Retrieved from https://quotes.wsj.com/GOOGL/financials