The total market value of the top three website operating companies in the U.S., and most likely the world, is almost $2 trillion. An astronomical amount. Alphabet Inc. (GOOG), Amazon.com Inc (AMZN), and Facebook Inc. (FB) are cash machines with little debt. They’re not even that old and yet they generated a total of $330 billion in revenue last year. For us, in terms of value, we look at these companies in awe. We are stringent in our method of looking for decent securities at depressed prices. These companies would be purchased if they were priced lower and yielded dividends.
Facebook and Alphabet are both selling at approximately 30x earnings. This isn’t that bad – too expensive for us – because these companies continue to generate huge amounts of cash flow without even employing huge amounts of capital. Alphabet Inc, probably the most efficient company in terms of operation, last year earned $13 billion on revenue of $111 billion. It has $102 billion in cash and $45 billion in total debt! Amazing. Facebook Inc, earned $16 billion last year from revenue of $41 billion. It has $42 billion in cash and only $10 billion in total debt. Another show stopper. Both of these companies are not even 15 years old yet.
Amazon.com Inc, a company from the early 1990s, earned $3 billion on revenue of $178 billion last year. It has $31 billion in cash and $104 billion in total debt. Whereas Facebook and Alphabet rely mostly on ad revenue, Amazon is a retail company. This can be seen by the debt burden Amazon has with respect to its peers. Alphabet and Facebook do not employ capital the way Amazon does. Amazon even has retail profit margins: 1.26% last year. That’s tight. Facebook and Alphabet have 39% and 20% profit margins, respectfully. Big difference. None of these companies yield anything, which is sad considering their market value.
We believe that Facebook and Alphabet, if they did yield anything, would be good purchases at lower prices. They are solid in terms of brand awareness and cash production. Although they are in a very competitive industry, these two companies are currently tops in their field and we believe they’ll remain that way for a while. Who knew that a website directory and a search-based website could generate so much ad revenue.
U.S. Business Investor Funds and Services 