Of all the companies I’ve come across in the last year of investing, Google has probably the cleanest and best-looking balance sheet of them all. Now I know balance sheets don’t offer much excitement to many people, but for anybody looking to get into the world of investing, this is just one of the three items you should always pay close attention to. Two articles ago, I offered up part of the criteria that I use to decide the companies I invest in. While Google doesn’t fit perfectly into my personal criteria, it was a company I was interested in (due to its pervasiveness in culture). And boy was I glad I broke one of my rules. Below, I’ll go through some of the highlights of the company, and what make it a company to add to your watchlist.
Huge Cash Balance
The company has a cash balance (including equivalents) of over $130 Billion. Read that line again. Sometimes I wonder how any company can have such a cash balance, and where such cash could be kept. Because that’s an absurd amount of money to have lying around. But that’s what Google has. That’s their armory. To put some perspective, Google has enough cash to straight up buy AMD or Netflix or Intel. For cash. Without debt. This kind of balance helps to ensure that the company can basically carry out any research and development needed. It can create new products and scrap them all-together without as much as a flinch. It helps explain why Google has never been afraid to kill off projects that didn’t perform to standard. There’s an entire website dedicated to projects Google has killed off, with over two hundred projects last I checked. There a laundry list of them: Hangouts, Play Music, Stadia, Play Movies, etc.. And that’s a good thing. Their war-chest allows the company to try things, quickly innovate, and cut whatever isn’t working.
There have been a number of wonderful projects and applications that have come out of this. The most significant is obviously YouTube. The platform had to exist for a long time as a cost inefficient experiment. But Google has been able to scale it to a point where I’d argue that its as big as Netflix, Disney+, and Prime Video put together. Where else do people go to a near daily basis today for everything from news to entertainment? And where else do advertisers have the same amount of attention as they do on YouTube. Its what is allowing the company to carry out the massive research needed to make Waymo, an industry leader in a quickly saturating market. I’m of the firm belief that Google, with its continued investments, can over time become the Berkshire of the previous generation. Only time will tell.
High Operating Margin
Software companies have one major advantage over every other type of company out there. Once they develop software, they can sell it over and over again for relatively little additional cost. This is what allows software companies to be as efficient as they are today. They need comparatively low manpower to operate. Google is one of the best companies at this. With an operating margin of over 30%, the company is pretty efficient at generating value for its shareholders (for every $1 the company earns, it keeps $0.3 for itself). This is in comparison to hardware heavy companies such as industrials that operate at 5% margin or so. Industrial companies that need massive investments in expensive equipment, factories and widespread operations, to expand just a smidge. Google, on the other hand, mostly only needs to ensure that it has enough servers to handle its operations. Manpower needs are relatively limited, as most software is written to run by itself. The company can therefore ramp up or drive down its operations swiftly.
Liquidity Ratios
Google’s Current and Quick Ratios hover around 3:1. This means that for every dollar in short term liabilities Google has, it has 3 in short term assets. The implication here goes back to the cashflow of the company. Google doesn’t have to worry about any short term obligations coming through, and them not being able to meet those obligation. It has three times the amount in short term assets that it can quickly redeem. Chief among them being its massive cash reserves. The risk of liquidation for Google is close to zero. Not non-existent, but pretty low. Its low debt position also means that it doesn’t have to commit large amount for cash to debt repayment. It can commit most of its money towards its actual business operations. This, again, ties in to the company’s cash balances.
Cashflows
The main advantage of Google’s highly efficient operations is that it generates huge cashflows for the company. See, cashflow - I think - is more important for a company’s survival than the amounts of profit it makes. Cashflow allows the company to keep running. It pays for its inventory, its employees, its electricity bill, its research and development. And Google generated over $50 Billion in cashflow in 2021. This feeds in to its massive cash balance discussed above. All that excess can be used in a number of different ways - advertising, acquisitions etc. - outside of those already discussed. And that’s on top of the company growing cashflow at a rate of over 30% over the last three years. Google as a company, is getting more and more efficient.
And so…
All these factors combined create a scenario that gives Google a sense of imperviousness. Its products are used on a daily basis, by over two billion people all over the world. It collects massive amounts of data that it can use to continuously evolve its products. Its business is relatively lean, especially for such a big company. It is generating huge cashflows from its operations. And its foundation - balance sheet- is as solid as can be. The only threat at this moment seems to be Google itself. Very few companies have become synonymous to our daily life. One of those companies is Google. The vast majority of the world interacts with at least one Google product on a daily basis. That could be googling something on the internet, looking for a video on YouTube, checking your email, using a smartphone, looking at your photos. You’ll come across a Google product. And that’s on the consumer side. The enterprise side - in terms of advertising - can’t market without using Google Ads and YouTube Ads (think of the relentless Glovo ads on YouTube). Companies can’t cooperate without using GSuite in one way or another. And Google Cloud is only growing. Google is a part of our daily life. We use it without even thinking about it. Its name is literally a verb now. That’s not to mention the community it has built around YouTube. With such power, can it be trusted to always operate in the best interests of tis stakeholders? Can it live up to its motto - Don’t Be Evil?