Saturday, 22 February 2020

Alphabet Revenues and Product Mix 2020

Google Search and products like Google Maps, Google Play and You Tube have become an integral part of our lives. Not a day passes by without using Google Search or Maps or You Tube and perhaps no other product or service has captured popular imagination as much as Google has in the last couple of decades. No wonder that Google attracts so much of regulatory attention. This article provides a description of Google's revenue mix and metrics. (of course,with some help from Google search!! and MS Excel not Google Sheets!)

In August 2015, Google has re-organized itself into a holding company called Alphabet with two subsidiaries – 1) Google includes main products such as ads, Android, Chrome, hardware, Google Cloud, Google Maps, Google Play, Search, and YouTube, 2) Other Bets include Access, Calico, Capital G, GV, Verily, Waymo, and X, among others. (Annual Report 2019)

To put things in perspective, Google accounted for 31.1% of global digital ad spending or $ 103.73 billion at the beginning of 2019. Google, Facebook and Amazon together account for 70% of digital ad spending in the United States which accounts for 40% of the global digital ad expenditure. (


In 2019, Alphabet earned more than 83% of its revenues from Google advertising and given below is the break up of total revenues.

Google Advertising Revenues

Google advertising revenues can further be segregated as shown below for the year 2019.

1. Google Search & other consists of revenues generated on Google search properties (including revenues from traffic generated by search distribution partners who use as their default search in browsers, toolbars, etc.) and other Google owned and operated properties like Gmail, Google Maps, and Google Play;
2. YouTube ads consists of revenues generated primarily on YouTube properties; and
3. Google Network Members' properties consist of revenues generated primarily on Google Network Members'properties participating in AdMob, AdSense, and Google Ad Manager.
(Annual Report 2019)

 Google Cloud

Google Cloud is the fastest growing segment of Alphabet for the past three years and the proportion of cloud revenues out of total revenues has increased from 3.7% in 2016 to 5.5% in 2019.

Google Cloud revenues consist primarily of revenues from Cloud offerings, including

• Google Cloud Platform (GCP), which includes infrastructure, data and analytics, and other services
• G Suite productivity tools; and
• Other enterprise cloud services.
(Annual Report 2019)

Google other Revenues

Google other Revenues contributed 10.6% to total Alphabet revenues and primarily consist of:

• Google Play, which includes revenues from sales of apps and in-app purchases (which is recognized net of payout to developers) and digital content sold in the Google Play store;
• hardware, including Google Nest home products, Pixelbooks, Pixel phones and other devices;
• YouTube non-advertising, including YouTube Premium and YouTube TV subscriptions and other services; and
• other products and services.
(Annual Report 2019)

Other Bets Revenues

Other Bets revenues contributed 0.4% of total revenues and primarily consist of revenues from sales of Access internet and TV services and Verily licensing and R&D services.


As per Alphabet Annual Report 2019,

Our advertising revenue growth rate has been affected over time as a result of a number of factors, including challenges in maintaining our growth rate as revenues increase to higher levels; changes in our product mix; changes in advertising quality or formats and delivery; the evolution of the online advertising market; increasing competition; our investments in new business strategies; query growth rates; and shifts in the geographic mix of our revenues. We also expect that our revenue growth rate will continue to be affected by evolving user preferences, the acceptance by users of our products and services as they are delivered on diverse devices and modalities, our ability to create a seamless experience for both users and advertisers, and movements in foreign currency exchange rates.

In the past three years, Alphabet's total Revenues have grown at a CAGR of 13.45% and Advertising revenues grew at 12.15%. Google Cloud is the fastest growing segment of Alphabet with a three year CAGR of 30.03% followed by You Tube ads at a three year CAGR of 22.95%.
(You Tube Ads monetize at a lower rate than traditional search ads)

Also the margins that Alphabet earns on its non advertising revenues are much lower than those on advertising revenues.

Google faces increased competition from Amazon and Facebook for the digital ad pie.


Google's advertising revenues from mature markets are stabilizing now (base effect) and revenues from emerging markets are growing at a higher rate due to increased digitization. 

As of 2019, 54% of Alphabet's revenues come from outside of the United States.

Alphabet invests heavily in research and development expenditures in areas such as artificial intelligence, quantum computing, life sciences etc.

Alphabet's founders Larry and Sergey wrote in the original founders' letter, "Google is not a conventional company.We do not intend to become one."

Up Next: DCF Valuation for Alphabet 

Wednesday, 12 February 2020

Avenue Supermarts DCF Valuation: Value per Share of Rs1,997.15

Avenue Supermarts has grown at CAGR of more than 25% in the last five years and its market cap crossed Rs 1.5 trillion mark in Feb 2020. The current market price is at Rs2492.10, trading at 124.1 times of earnings against an industry average of 97.18 times PE ( The stock overtook NTPC, Indian Oil Corporation (IOCL), Coal India, UltraTech Cement and HDFC Life Insurance Company in the past five weeks to stand at number 20th position in the overall market capitalisation ranking. (Business Standard, Feb 2020)

Avenue Supermarts has all the attention of the stock market participants and a discounted flow valuation has been presented below. The promoter shareholding is around 80% and as per SEBI norms they need to shed another 5.21% before the end of the current financial year. Assuming that the QIP and proposed OFS fetches a total of Rs8000 crores in the current year, the DCF valuation gives a value of Rs 1997.15 per share. The assumptions used in this model are described below.  

The methodology used is based on Prof. Damodaran's book on Valuation ( and financials have been sourced from

Key Drivers of Value

1. Revenue Growth: The biggest driver of value for Avenue Supermarts is its revenue growth. As of Jan 2020 Investor Presentation, 51% of revenues come from food segment, 20% from Non Foods FMCG and 29% from General Merchandise and Apparel. These are segments that have potential of growing at 20 to 30% per annum in the coming years. Moreover, organized retail constitutes only 10% of the total retail market in India, therefore, the potential is huge with improving demographics.

2. Operating Margins: Those of us who have visited D-Mart stores can relate to the no frills and value retailing focus. Their deep knowledge of optimal product assortment, strong supplier network, high operating efficiency and lean cost structures help them in maintaining their operating margins now and in the future. (Investor Presentaton, Jan 2020)

3. Risk Profile: By consistently generating increasing revenues quarter after quarter, Avenue Supermarts is able to reduce its risk defined in terms of beta ie., variability in stock price returns. Avenue Supermarts beta calculated on a three year monthly basis (since its listing on stock market) is much lower than the sector average. (0.66 vs 0.87)

Link to DCF Valuation Model for Avenue Supermarts:

4. Increased investment and steady foot print expansion: For every rupee of capital that is invested, Avenue Supermarts is able to generate revenues of close to three rupees. Avenue Supermarts has increased its foot print to 196 stores as of Jan 2020 and plans to increase its foot print further. In the current year, they are going to raise Rs8000 crores by sale of promoter equity to institutional investors and they are going to use this money for investment and expansion.

5. Tax Reduction: The marginal tax rate for Avenue Supermarts has decreased from 34% to 22% from the current financial year. Therefore, they will be encouraged to payoff their debt and increase their investments further.

6. Strong Management Team and Human Capital: Avenue Supermarts has a strong management team and entrepreneurial background. They nurture their human capital by providing training and rewards to their employees. (Annual Report 2018-19)

7. Integration with technology: Avenue Supermarts integrates and streamlines its business processes with the help of technology to support key aspects of business including cash management systems, in-store systems, logistics systems, human resources, projects management, maintenance and other administrative functions. (Annual Report 2018-19)

8. Barriers to Entry: Foreign Direct Investment (FDI) in multi-brand retail is limited to 49%, so foreign players have to make investments in partnership with domestic players. This limits foreign entry into retail and provides much needed and valuable time for domestic retailers like Avenue Supermarts. Given the sheer size of the domestic retail sector, competition from Reliance Retail, Future Retail, Amazon More Retail, Walmart-Flipkart and others may not limit their revenues and margins.

The Way Ahead

Avenue Supermarts needs to stick to its value retailing strategy, steadily expand its footprint and integrate its brick and mortar business with the e-commerce model.

Investors' discretion is advised.