Sunday, October 25, 2015

Alphabet (former Google) or Intel - An Alternative Look At Investing

Alphabet (former Google) is an excellent business. Year to year, quarter to quarter, the company improves its financial results. Please, look at the chart below:

Of course, due to the fact that now the scale of the Alphabet's business is much bigger than it used to be a few years ago, its revenue, operating profit and cash flow from operations are not growing as much as a few years ago - please, look at another chart:

 In my opinion, one of the best metrics to measure how the investment in any company is performing is the so-called free cash flow. Simply put, free cash flow is a difference between cash flow from operations and investment made by a company. My formula goes as follows:

Free Cash Flow = Cash Flow From Operations - Purchases of Property And Equipment - Acquisitions

I have calculated combined free cash flow for Alphabet and Intel, starting from 2009. For many years there was practically no inflation therefore adding up all free cash flows generated each year  is not a big error (although it is a little bit unorthodox way of an investment's performance measurement).

Then I compared the combined free cash flow to the value of investment in 2008, calculated as the market capitalization at the end of 2008. Therefore the ratio defined as:

Combined free cash flow / Market cap

shows how much cash an investor would get for its initial investment after nearly 7 years of holding the shares of Intel or Alphabet.

Please, look at the chart below:

This chart shows that an investor putting his/her money in Intel would get 86% of its investment back. As for Alphabet, this ratio would be much lower - just 25%. Let me show it, using figures.

At the end of 2008 the Intel's market capitalization was $58.6 billion. Then, between 2009 and 3Q 2015 the company generated free cash flow of $50.6 billion - hence the ratio of 0.86.

In the case of Alphabet , these figures were: $216.4 billion, $54.3 billion and 0.25, respectively.


Both businesses, Intel and Alphabet, are excellent ones. However, from an investor's point of view, Intel looks much better than Alphabet. Simply put, at the end of 2008 Intel was relatively much cheaper than Alphabet.

What is more, the Intel's shareholders were rewarded with a 204% gain, while the Alphabet's shareholders booked a gain of "just" 103%.

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