There was a time when Google was simply a search engine, slugging it out with Yahoo for the loyalty of internet clickers. There was a time, too, when Google’s shares were worth less than $100, a level that, when it was breached 13 years ago, prompted worries that the group was overvalued and little more than a flaky dotcom stock.
Look at Google now. The battle with Yahoo is long over and the group’s tentacles stretch far and wide. It owns Gmail and the Youtube video-sharing service and makes the Android mobile operating system. It has a venture capital business, invests in life sciences and provides broadband services and internet connections to rural American homes. Through its Waymo subsidiary it is developing autonomous cars and, elsewhere, investing in the kind of artificial intelligence that makes Google even more attractive to advertisers. And as of 2015 all these businesses have been housed under a single holding company, Alphabet (as in a market-beating “alpha” bet).
Alphabet shares, traded on the technology-heavy Nasdaq exchange in New York, were worth $1,258 at the close last night, valuing the group at almost $840 billion. It is one of a select few American businesses, including Apple, Microsoft and Amazon, with valuations approaching $1 trillion.
Alphabet’s second-quarter results reported on Monday far surpassed analysts’ expectations. Its revenues rose by 25.5 per cent to $32.7 billion over the three months to the end of June compared with the same period last year. Most of this came from Google’s advertising revenues, which rose by 24 per cent to $28.1 billion. Traffic acquisition costs — how much it must pay other companies to help to bring in its users and to distribute its advertising — rose in top-line terms from $5.1 billion to $6.4 billion over the quarter. However, as a percentage of advertising revenues, costs rose from 22 per cent to 23 per cent as paid-for clicks soared.
Indeed, Google is making so much money that even after taking a $5.1 billion charge to cover last week’s record fine from the European Commission for anti-competitive behaviour with Android, it notched up net profits of $3.2 billion, comfortably above the highest forecast.
For a company that promised to make its reporting “cleaner and more accountable”, Alphabet is opaque about its other earnings. We don’t know how much Youtube makes, for example, despite some analysts speculating that its revenues are higher than those of Netflix, which last year touched $11.7 billion. Google bought Youtube for $1.65 billion in 2006. Nor do we know much about Waymo, which tells us little more than the number of self-driven miles that its expanding fleet of cars have clocked up — eight million as of this month. Yet just over two months ago, analysts at UBS pencilled in a valuation for the autonomous cars unit of up to $135 billion. That is almost one and a half times the value of Ford and General Motors combined.
There is always the risk of regulatory crackdowns, but Google’s earnings and the potential value in its subsidiaries are so high that Alphabet has the money to buy its way out of trouble. The shares trade on mad technology-market valuations: Alphabet is valued at more than 66 times last year’s after-tax profits and, extraordinarily, its yield is zero as it doesn’t pay a dividend. That means you’re buying a business solely based on its growth potential and rising share price. In Alphabet’s case, given that it also has no shortage of ideas about what to do with its huge cash resources, it’s worth it.
Advice Buy
Why Alphabet is a Pandora’s box of potential value and possibilities for future growth
Unite Group
If your child is going to university this year, there’s a reasonable chance they’ll be staying in Unite Group digs. Unite is the biggest single provider of student accommodation and about 52,000 students will be sleeping under one of its roofs during the coming academic year, out of a total undergraduate population likely to reach about 530,000.
The business, founded in 1991, develops and manages student accommodation. It specialises in finding properties that serve the highest-performing universities, including in London, Manchester, Bristol and Edinburgh, where the student population is consistently growing.
It turned in an impressive set of half-year results yesterday. Pre-tax profits rose by 70 per cent to £142.5 million over the six months to the end of June, although this included a slightly artificial uplift based on an increased valuation of its properties. Even under its preferred measure of earnings based on European Public Real Estate Association recommendations, which strip out distorting measures, earnings rose by a healthy 31 per cent to £52.9 million. Unite lifted its half-year dividend by 30 per cent to 9.5p a share, and that helped to push the shares 14p higher to 854p.
Unite’s tenants pay a premium to the prevailing market rent of between 5 per cent and 10 per cent, although this appears justifiable given the services the company provides, from security and the use of swimming pools to free tea and coffee. And Unite is growing; this year it is operating 2,400 more beds than in the past academic year and it has announced the £102 million acquisition of a 678-bed development in Wembley, northwest London.
Unite’s shares have more than doubled in value over the past four years and are nearly 12 per cent above their level for a £170 million placing at 765p in February to raise funds for two new schemes in Oxford and London. In property sector terms, the shares are not expensive, at just over nine times earnings, although the yield based on last year’s payout is modest at 2.7 per cent and is the only reason not to make it an outright “buy”.
Advice Hold
Why The low yield is the only setback in a strong business
