Why Whitney Likes Alphabet More Than Apple – And Buffett Doesn’t

0
Why Whitney Likes Alphabet More Than Apple – And Buffett Doesn’t
PhotoMIX-Company / Pixabay

Whitney Tilson’s email to investors discussing Alphabet Inc (NASDAQ:GOOGL)’s earnings and share repurchases; Apple Inc (NASDAQ:AAPL)’s share repurchases; why he likes Alphabet more than Apple – and Buffett doesn’t.

Get The Full Walter Schloss Series in PDF

Get the entire 10-part series on Walter Schloss in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q3 2021 hedge fund letters, conferences and more

The Man Behind TCI: One Of The World’s Top-Performing Hedge Funds

TCI David Marcus Investment ResearchThe Children's Investment Fund Management LLP is a London-based hedge fund firm better known by its acronym TCI. Founded by Sir Chris Hohn in 2003, the fund has a global mandate and supports the Children's Investment Fund Foundation (CIFF). Q3 2021 hedge fund letters, conferences and more The CIFF was established in 2002 by Hohn Read More

Alphabet's Earnings

1) Alphabet (GOOGL), one of the original core holdings in both of our flagship newsletters, Empire Stock Investor and Empire Investment Report, reported blowout earnings after the close yesterday.

Revenue grew 41%, its highest growth rate in 14 years. Expenses grew more slowly, leading its operating margin to soar from 24% to 32%, its highest level in a decade. Its operating income surged 88% to a record $21 billion, and free cash flow hit $18.7 billion, up 61%.

The only reason the stock isn't up big today is that it was already up 58% for the year, far surpassing the 18% average gain of the other tech giants, Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Facebook (FB).

We continue to believe that this company has a long growth runway ahead of it and that the stock will follow.

Alphabet's Share Repurchases

2) An increasingly important driver of the stock going forward is likely to be share repurchases. Last quarter, Alphabet also bought back $12.6 billion of its stock, continuing the recent surge in this area over the past five years, as you can see in this chart:

WTD 10 27 Image 1

Keep an eye on this. While Alphabet's share count only declined by 1.4% year over year, I think this will increase substantially over time as the company continues to gush free cash flow.

Apple's Share Repurchases

3) To see what an enormous impact this can make over time, just look at Apple. Under its founder Steve Jobs, the company rarely repurchased any shares. But then Jobs died in 2011, and activist investor Carl Icahn started pushing for repurchases in late 2013. The company began to do so in increasing size, continuing through today, as you can see in this chart:

WTD 10 27 Image 2

As a result, Apple's diluted shares outstanding have declined by a stunning 35% (which translates into a 54% boost in earnings per share), as you can see in this chart:

WTD 10 27 Image 3

The performance of the business is most important, but the share repurchases have also been an important contributor...

102721 WTD aapl

Going forward, however, I don't think Apple's share repurchases will provide nearly the same tailwind because its share price has risen so high that even the increase in share repurchases from $70 billion per year in 2019 to $90 billion in the past 12 months isn't moving the needle as much.

As you can see in this chart of the year-over-year decline in diluted shares outstanding by quarter, the decline has been shrinking for nearly three years:

WTD 10 27 Image 4

With this year's run-up in its stock price, the math is similar for Alphabet, but just not quite to the same degree, as its market cap is less than $1.9 trillion versus nearly $2.5 trillion for Apple.

Why Whitney Likes Alphabet More Than Apple - And Buffett Doesn't

4) As I compare these two companies, it's worth looking back to the article I published in July 2018: Why I like Alphabet more than Apple – and Buffett doesn't.

As you can see in this chart, I was right that Alphabet would outperform – it's up 120%, double the rise in the S&P 500 Index – but dead wrong that it would do better than Apple's stock, which is up more than 200%:

102721 WTD googl aapl

I'd like to think that, rather than being wrong, I was simply early. As you can see in this chart, over the past 14 months, Alphabet has far outperformed both the S&P 500 and Apple, which I think is likely to continue in the coming years:

102721 WTD googl aapl spx 2

Best regards,

Whitney

Updated on

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
Previous article Soaring Gas Prices: Best State To Switch To An EV
Next article Tech Stocks Save The Day

No posts to display