The Pros And Cons About Google’s Alphabet

The creation of the new holding company will have profound effects on Google (GOOG). The current structure, mixing organic initiatives with a kind of venture capital, has allowed for the emergence of interesting new services like Android and Chrome, that have strengthened Google’s position. However, it has also masked a lot of underperforming experiments.


(photo: Karen Horton)

Although, this might not be the currently accepted mainstream management philosophy, I believe that the current structure was good in terms of managing an innovative organization. It allowed for young initiatives to grow under the protection of Google’s cloak. Unfortunately, it also created a conglomerate discount on the company stock price.

So, the biggest advantage of this transformation lies on the fact that Google as a standalone business unit will have much cleaner financials. Investor can look at the search engine as the fillet mignon and value the company through sum of the parts. On the medium term, financial exercises striping Alphabet of all the money absorbing activities will become a common exercise between analysts. This is Wall Street’s dream.

Cooperation or Competition?

However, this new structure might create new obstacles to innovation within Alphabet. Firstly, will the usual freedom for employees to invest time in new projects be maintained? The creation of new cost centers might raise incentives to each business unit to compete between them, removing the possibility of employees allocated in a given unit to participate in new ventures elsewhere. Employees are considered a cost in the companies where they belong, therefore, to have them working for other units for free is helping others at the cost of our own budget. You can extrapolate the previous example to other types of resources. This myopic view is very common when the management allow silos within the organization.

You can’t handle the truth!

Secondly, disclosing detailed financials for incubated ventures might trigger a reaction from activist investors demanding for the management to get rid of the underperforming units. Obviously, this could meant the death of projects like the self-driving car, the Google Glass and Google fiber among others. Allowing investors to know where the money is going might not be the wisest thing to do in companies that bet so much in an uncertain variable like innovation.

No vision, no hope

Finally, the company might lose its purpose and unifying vision. Although, many of Google’s projects don’t seem to have much to do with search engines, the truth is several of the high profile projects respect the company’s main activity: creating audiences for ads.

Yes, creating audiences is Google’s main activity. The indexation of online information and development of a way to find it easily through something commonly known as search engine was the first step to dominate the online ad market. So, when the internet started to become a reality in mobile phones, Google was already working on an operating system. As the search market spread to mobile phones, Google was effectively working on increasing its audience.

Google Chrome and Chrome OS are also initiatives pursuing the goal of consolidating a loyal audience. From here on I am merely speculating, but I believe that the Google Glass, the self-driving car, the Google Fiber, and the Project Loon (internet balloons) are also projects respecting the pursuit of a broader audience. The Google Glass could expand Google’s dominance to augmented reality, which could mean increasing a lot the number of hours that each user passes using Google services (i.e., being part of the audience). The self-driving car could allow users to free up commute time that they can use to access the internet. Project Loon is about bringing the internet to remote areas thus increasing the audience. Even Calico could be seen by as a way to extend the life of its loyal audience (maybe too much Machiavelli on this one though).


Obviously, effective results will depend a lot on how this new structure is implemented in practice. Alphabet might end up being the best move that Google’s management has ever done to avoid becoming another dull corporation but it just seems to be the other way around. Wall Street is clearly euphoric with the idea of having detailed numbers for each unit, however, a conglomerate of individual units means raising walls within the company – which is exactly what decadent corporations do.

Google has beaten the broad market (SPY) by a heavy margin since the IPO. The secret sauce has been applied innovation. The new structure indicates that Google wants to become a conglomerate of diversified innovative business units. Although, this might seem interesting in theory, I think this might create a destructive competition within the company. For instance, I am not seeing Apple (AAPL) dividing its operations in standalone business units. We won’t see Apple creating a company for the Macintosh and other for the tablets. The Macintosh business unit would have never allowed the rise of the tablet unit knowing that it would end up cannibalizing the Mac sales. The tablets were allowed to grow and thrive thanks to a vision of a greater good for the whole company.

A Game of Thrones: Greece and the European Equities Decline

The Greek case shows that Europe has a laggard vision

Once again, the Greek government sold the Greek people. Paradoxically, it’s a defeat for Greece and for Europe. But above all, it’s a bad service to democracy. It seems like it doesn’t matter which side is governing a given country, the outcome will always be the one chosen in Brussels.

The old aristocracy reigns in Europe, they’ve left the common people have a taste of the purchasing power of the Euro. But now common folks are enslaved, bended by the very same Euro. Europe is building a laggard society to serve the old aristocracy.

My point focuses on the fact that the old grocery store math doesn’t work anymore. Economic systems resemble biology. They grow, evolve, adapt and mutate which makes them unpredictable. That is why the gold standard failed and any system that it’s based on a zero-sum philosophy will fail. However, the Neo-classic economy philosophy that rules Europe just can’t deal with this fact. They will keep screaming that the Sun circles the earth. Obviously, this won’t do us any good.

Without a vision of progress, Europe risks to repeat the errors of the past

They just can’t let go. It’s better to die in a world that they’ve always known than to let others pave the way to the future.

I once wrote these same words to describe the end of the Roman Republic. Look how closely this resembles to our reality. It’s not that farfetched to believe that the Euro zone might share the same destiny as the old Roman Republic.

But above all, the Greek government did a bad service to democracy. It will take a long time before any country will have the courage to empower an anti-establishment party. However, we have learned one important lesson: no one can try to negotiate with Europe holding a mere bluff. The next rogue government that tries to pull a trick against the EU must have an executable plan to leave the Euro (meaning Foreign Currency Reserves). Without that, the ECB will always pick the winner. And that is why I believe the Euro zone has started its decline. It might pass a long time before anyone tries to defy the EU, but when they do, they will be ready to break it. And by the Murphy’s Law, if something bad can happen, it will happen – it just didn’t happen this time.

The negative vision on the European society is a bad sign for European equities

Going forward, there can’t be much hope in any kind of long term outperformance by the European equity markets. The European retrograde elites are running the European companies based on a laggard set of management principles. This explains why, for example, Finland now a troubled country, lost Nokia (NOK) and Europe lost its jewel of the crown in the tech sector. Obviously, the old aristocrats don’t know much about smartphones and mundane stuff like that so in their perspective it was probably better to just get rid of it.

The United States with all its defects (and congress deadlocks) has by far a much better set of principles ruling the country. This is the main reason why, after I’ve started this blog to identify undervalued companies in Europe, I have been mostly identifying opportunities in the US. Europe is in decline and usually there aren’t that many opportunities in a context of slow death.

Going forward, European Jewels will just be a name. I’ll keep it but I could just call it Investment Jewels. It would probably do more justice to the blog, since I believe most of the opportunities are in the US (SPY), not in the decadent Europe.

A Valuation Approach for 3D Systems (DDD)

Previously, I’ve wrote a long article on 3D Systems (NYSE:DDD). There, I focused on analyzing the company organization and the product conception philosophy. In other words, I was interested in the growth potential of the company. However, in this text, I want to present a different perspective about 3D Systems. I want to present an analysis from a valuation perspective.

3D Systems has achieved profitable growth

Looking at 3DS historical operating performance:

Table1 – Gross and profit margins 2014 to 2009

We can see that the company has performed well in terms of gross margins from 2009 until 2013. Last year, the gross margin had a significant decline in line with the overall downturn in the company operations. In terms of profit margin, 3DS made a similar progress by significantly improving its profit margins from 2009 to 2013. In 2012, the company achieved its best profit margin for the analyzed period at 14.5%.

The margins performance is one of the reasons that make me like this company so much. Basically, the company has already shown the ability to achieve strong profitability even before achieving, let’s say, USD 1 billion in sales. At the same time, 3DS has been able to grow very fast, capitalizing on the growth spurt of the whole industry.

Underperforming the general market

3D Systems has proved its worth by achieving profitable growth. However, the fact that the industry is still small increases the likelihood of hiccups along the way:

Graph 1 – Stratasys (SSYS) vs. 3D Systems (DDD) vs. S&P 500 (SPY) from 2013 to present (

After a good performance in 2013, both Stratasys (SSYS) and 3D Systems started a prolonged disinflation process. Presently, both companies are underperforming the S&P 500 (SPY) by a wide margin as you can see in graph 1. This makes me believe that the downward movement in the stock price is related to the investment community perception about the whole industry rather than just a 3D Systems specific issue.

Valuation exercise

One interesting exercise would be to compare the profits for 3D Systems under different assumptions. In the following table, I have selected 2 main drivers: sales growth and profit margin.

Table 2 – 3D Estimations for profits in 3 years given different growth rates and profit margins

In the first row we have the margins, in the left column we have the revenue growth rate. Figures in thousands USD.

The previous table offers estimations for the next 3 years under different scenarios. In my opinion, the scenarios are the most probable given the present information. I am selecting a 10% to 40% annual growth rate interval and a 7% to 15% profit margin range. However, outcomes outside of this set of scenarios are possible and will lead to very different results from the ones I will present shortly.

Obviously, the different outcomes inside our table 2 will lead to very different earnings multiples. Based on my experience, I selected the following possible scenarios:

Table 3 – Estimations for the earnings multiples for 3D Systems

As an example, selecting a 10% margin and a 30% growth rate we would result in an earnings multiple around 35x. This would mean a market cap around USD 5 billion which compares with the current market cap around USD 2.4 billion. Assuming 120 million shares outstanding by then, the resulting stock price would be around USD 38.66. The next table summarizes the whole set of stock prices under the selected scenarios.

Table 4 – Estimations for stock price for 3D Systems in 3 years under the different scenarios


The presented scenarios offer a broad view about the possible upside/downside relation for this investment case. The important aspect here is to understand that 3DS stock price will be extremely sensitive to variations in sales growth and profit margins.


(Photo credit: 3D Systems)

I believe this is investment has a high upside/downside relation, which means that the pay-offs may be much higher than the capital at risk. However, there is a lot of uncertainty related to the company sector. Therefore, I believe this investment is suited for an aggressive investor that also uses well diversified portfolios. Only this way will it be possible to accommodate capital losses that may arise from this investment.

Of Interest: Best Buy and Varoufakis


From this week, I highlight two main events: Best Buy’s earnings release and the profiling on Yannis Varoufakis in the NYT. These two pieces make a very interesting read:

Best Buy presented results that topped analysts’ expectations. Earnings were pressured from restructuring charges. These one-off items are related to the disposal of several international stores, specifically in Canada. Overall, the results are in line with a positive execution of the turnaround.

Varoufakis is a key character in the negotiations with Greece. Of importance is the fact that the outcome of these negotiations will shape the future of the EU. The New York Times did an extensive profiling on Varoufakis. This a very interesting work piece that can help us to better understand the man behind Greek’s financial policy.

Have a nice weekend!

HERE Maps Might Be Hiding Nokia’s Future Path

When Nokia (NYSE:NOK) was still a mobile phone powerhouse, it bought a company called NAVTEQ. The transaction was made at around € 6 billion ($ 6,7 billion assuming the EUR/USD at 1.12), slightly less than the € 7.5 billion ($ 8.4 billion) that Nokia sold the once mighty mobile business to Microsoft (just to put some perspective on the whole matter).

(Photo credits: Titanas)

Although that could be considered as an obscene deal, it made sense when Nokia was still defending its leadership in the mobile industry. Location-based services were and still are expanding rapidly and are inseparable from the use of smartphones. However, paying € 6 billion ($ 6.7 billion) in 2007 for a company that currently is delivering sales around € 0.25 billion ($ 0.28 billion)with an operating margin between 9% to 12%, could be considered as pretty optimistic.

Now, we have the rumor about Facebook (NASDAQ:FB) Baidu (NASDAQ:BIDU) and Uber being interested in Nokia’s maps unit. I have seen a wide range of valuations attributed to this deal ranging from € 2 billion to € 7 billion. I think that the future of HERE might tell a lot about what is going to be Nokia’s future in the smartphone market.

If the company sells the maps unit for something around € 2 billion ($ 2.24 billion), in my opinion, this means that Nokia is not that serious about re-building a complete ecosystem around their rumored phones. The maps unit is a very good opportunity to build tailored smartphones with a higher degree of services differentiation. So if Nokia sells the unit at a € 4 billion ($ 4.48 billion) loss it must be because it is more worried about scavenging what’s left from the past than in leveraging its current assets for the future.

However, there is trade-off between securing the maps unit in order to fuel future services, and recouping the obscene amount of money used to buy it 8 years ago. In my opinion, if the offer allows the company to fully recover the invested money in the maps unit, I see a rationale for selling. In this case, the company could use the money to better prepare for a smartphone comeback, obviously without the differentiation provided by a state of the art maps unit. On the same note, it would be hard to justify that, after getting the opportunity to fully recover its money, Nokia chooses to keep an unit that has not evidenced stellar performance in 8 years. In conclusion, I see a € 2 billion deal as too low and a € 7 billion worth considering.

Bottom-line is: This rumor will play a very important role in identifying the Nokia’s management real intentions in relation to the future. In one hand, we have many people speculating about Nokia preparing a comeback. But on the other hand, Nokia’s management has been too blasé, always dismissing any kind of return. They have always stated that any hardware device will always be trough licensing to third parties (which is not the best way to keep a brands’ charisma and identity). Basically, now the execs will have to commit to something and this will give us a better insight to whether the company is going to become a low margin telecom equipment provider or will try to regain its status of a high tech corporation.

Earnings Digested: Santander Presented a Set of Good Results in 1Q15

Santander presented earnings 32% higher year over year.

There were two main contributors for this result:

  • Higher gross income:


  • Lower loan-loss provisions:


The results indicate that Santander is clearly on a normalization cycle. As I said before, the return on equity will be lower than during the pre-crisis period for the whole industry – this was a major structural shift.

In 1Q15, the ROTE for Santander was 11.5% while the bank is targeting a ROTE around 12-14% for 2017. To improve the ROTE, the bank is focusing on:

  1. Improving customer loyalty and engagement with the bank. A better franchise able to capitalize on the huge clients base will bring in higher profitability.
  2. Improvement in capital allocation that provide adequate returns and allow lower NPL’s. One example is the joint-venture with Pioneer for an Asset management unit.

This seems a good strategy, since the financial leverage from pre-2007 is no longer available, the improvement in performance has to come from the real business. Getting the best customer through better services is the answer to get a better yield from the banks’ asset base.

Bottom line: Good results for Santander, in line with the expected progress for the normalization of the bank’s results. In the following quarters, I believe this trend might continue.

Spreadsheets for my Valuation on Adidas

For 2018, I am considering the following baseline scenario for Adidas:

  1. Sales growth around 7% per year;
  2. Profit margin near 5%;
  3. Multiples between 25x and 20x earnings.

You can read my full thesis and valuation on the stock here

But the main reason why I am writing is the following: For the first time I am offering the base spreadsheets for an analyzed company. My goal is just to provide basic (but accurate) information for my readers to use in order to test my assumptions and to test their own. Therefore, I am offering my own compilation of data (but not the complete set of subsequent calculations that led to the several assumptions and final valuation). Obviously, I feel comfortable with the data (I took it directly from the 10-K with minor adjustments) but I do not guarantee the reliability of the data presented. For investment decision purposes, I advise you to look at the original data before making any decision. However, if you are starting your research, you can use my spreadsheets for an initial recognition of the company.

I want to help my readers to overcome a problem that I so often have: to have a source of financials with 5 or more years, that is reliable enough and ready to use to start drawing some ideas about the company. I used to get that from Reuters website (not the ready to use part), but I had some ill experiences with bad data that had material effect on the conclusions. I believe this can enrich the readers’ experience since one can just download the data and confront it with the whole article right away.

That said, this is an experiment, you should see as such. If the feedback is good (please feel free to provide your feedback in the commenting section), I’ll do it more often and I may even add more information like cash-flow statements and some ratios.

Adidas Spreadsheet: Includes Income Statement and Balance Sheet from 2009 to 2014, ROE decomposed and Return on Retained Earnings.

Nike Spreadsheet: Includes the Income Statement and Balance sheet.

Note: The links will be online for a limited time.