Alphabet Inc. (a.k.a. Google): A Case Study In Spotting Value Creation

On June 22, 2015, Tom Gayner, Co-Chief Executive Officer of specialty insurance underwriter Markel Corporation, gave a presentation titled The Evolution of a Value Investor during the lunch hour to the employees of Google, the world’s largest internet company. Mr. Gayner began his presentation by summarizing his business background as a Certified Public Accountant and security analyst before taking a position as an Investment Officer for Markel Corporation in 1990. Tom’s 58-minute presentation may be viewed on YouTube and, in my opinion, is most insightful and well worth the time.

Tom acknowledged that his initial approach to investing had a quantitative bias that utilized fundamental metrics to analyze common stocks. He mentioned that these fundamental metrics worked well for Benjamin Graham, and other value-oriented investors, in the post depression years when securities were grossly mispriced relative to net assets and earnings. Conversely, Tom’s experience using only the quantitative approach was less than satisfactory in stating that, “the pond has gotten a little overfished. The quantitative approach is good for spotting value. It is a snapshot or picture in time of a business, but it does not provide enough information to determine the future prospects and success of a business.”

His investment approach then evolved to one that was more qualitative and focused on spotting the creation of value. Instead of a snapshot or picture, he began to analyze a business as if it was a movie and how the reel is going to unfurl so as to better understand the valuation of the business over an extended period of time. He became more interested in determining what the business valuation would be five and ten years in the future as opposed to one specific period in time and whether value was increasing, static or deteriorating.

 Tom’s investment philosophy focuses on four points of view with the following characteristics:

  1. Businesses that have a demonstrated record of profitability and the ability to earn high rates of return on capital with little or no leverage (debt).
  2. Management that has integrity and ability because “one without the other is worthless.”
  3. The reinvestment dynamics of the business allow it to reinvest and compound its profits at high rates of return, which lead to an increased valuation.
  4. The price paid for the business in relation to its long term value creation potential is attractive.
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I am long shares of Alphabet (GOOG) at the posting date of this article. 

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Joe Economy 3 years ago Member's comment

Current analyst opinions are 4 strong buys, 7 buys, 1 hold, but at $716 the stock has a long way to drop. The company has over 64 thousand employees which is a massive burden if things change for the company, but revenues of $78 billion is a decent buffer.