100 Years?

Below is my response to a recent buy side job application question. Trying to go a post without mentioning Buffett or Munger or Berkshire but failing miserably so far. Also did not choose Berkshire as it is in the firm’s 13F. Feel free to let me know what your response to this question is.

If you could only own one business for the next 100 years, what would it be and why? (please do not select a company on our 13F) (max 500 words)

         “Google has a huge new moat. In fact, I’ve probably never seen such a wide moat.”

                                                 Charlie Munger.

Theme: Again, as Marc Andressen put it, “Software is eating the world” and the firm’s most likely to benefit from this are technology platform companies. Ben Thompson put it best in his brilliant post “Aggregation Theory.” The idea being suppliers are being modularized (Hotels rooms become a room in a house) by technology distributions (Airbnb in this example) who then take a disproportionate share of the spoils (users get onto Airbnb to find a room anywhere in the world with Airbnb getting a cut).
Thesis: Alphabet (formerly Google) is the ultimate platform company with several of its platforms (Android, Maps, Chrome, YouTube, Gmail, Search, Google Play all boasting over 1 Billion users each). Sure, almost all Google’s revenues are from its core search/advertising business but look deeper and you can recast it as a transportation business (Uber has to pay Google for every request to its maps API of which there are probably thousands every minute) or a music business (Google Play music keeps a portion of subscriber fees and pays the balance to music publishers).

What is the TAM of search: The global advertising is an approx. $600B market, online is approx 38% of this and Google is 44% of online (approx. $100B). Can online one day be 50% of advertising and Google maintain its position. With modest growth in GDP it is not entirely impossible for Google to double its revenue in 5 to 10 years. Now to get creative, if a brand, say Louis Vuitton, has to close a prime retail location (say London or Manhattan) because retail is migrating online, how much of its former rent will LVMH pay for a “prime location” on Google Search? See it this way and the TAM of search becomes more unbounded.

Valuation: So, what are you paying today for the search business? In my opinion, not much if you are conservatively creative with the numbers. Over the past 12 months Alphabet had FCF of approx. $25B. But if you dig deeper, The Other Bets segment incurred $3.5B of operating losses. Net of tax the core search business is earning closer to $28B in FCF. With $91B of net cash on the balance sheet, and a market cap of $650B, one is paying a fair 20x FCF for the core business growing at between 15 to 20% a year.

Free option on a fantastic future:
Alphabet’s Other Bets segment includes Google Fiber, Verily (Life Sciences), Waymo (Self Driving cars), Nest (IOT), Calico (Combating Aging) GV & CapitalG (Venture Capital, Wing (Drones).

Culture: To last a 100 years, a company must have strong culture and Google is more like another company that has a strong culture than one might imagine, Berkshire Hathaway. Google published an owner’s manual in 2004 inspired by Buffett and have transformed to a holding company structure (Alphabet) and hired Ruth Porat as CFO to rationalize capital allocation.
The world of bits (tech companies) will always be more prone to change than the world of atoms and immutable laws of physics (railroads, utilities, etc.)

Antitrust: In a world of slow growth, higher inequality and more winner takes all scenarios there is the chance of a backlash against tech companies having a larger share of the spoils. See Google’s $2.7B settlement with the EU.

Social: Google missed “social” and Facebook now has a walled garden and is fast on Google’s heels.

With all credit due to:

Wexboy’ post , Ben Thompson on Aggregation , Greenhaven Q2 Letter , Alex Moazed’’s Modern Monopolies , Google’s Investor Relations , Stevenoop’s TAM post & Horizon Kinetic’s Q2 letter .

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