Professional Documents
Culture Documents
Whitney Tilson
Kase Capital Management
14th Annual Value Investing Seminar
Trani, Italy
July 14, 2017
-5-
Goldmans Stock Is Up 58% Since Then
-6-
I Called Spirit The Next Ryanair and Wrote: There are
very few companies Im aware of that are growing 20%+,
with ~25% operating margins and returns on equity, with net
cash positions, whose stocks are trading at a P/E of ~10x
-7-
Spirits Stock Is Up 22% Since Then
-8-
Betting on the Best: Alphabet
I was very skeptical of Alphabet when it first went
public, as I outlined in a presentation I gave at
Alphabets headquarters on Nov. 21, 2014 entitled:
-11-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
-12-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
Think about it. What are the odds that it is the leading search engine in five
years (much less 20)? 50/50 at best, I suspect, and I'd wager that odds are
at least 90% that its profit margins and growth rate will be materially lower
five years from now. Yet investors appear ready to value this company at
as much as $36 billion, nearly 200 times trailing earnings! Google with the
same market cap of McDonald's (a stock I own)?! HA! I believe that it is
virtually certain that Google's stock will be highly disappointing to investors
foolish enough to participate in its overhyped offering -- you can hold me to
that.
-13-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
90%
Gross Margin %
80%
EBIT Margin %
60%
50%
40%
30%
20%
10%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 TTM Q3
'14
-14-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
$60
($B)
$50
$40
$30
$20
$10
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 TTM Q3
'14
-15-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
Revenue Growth Has More Than Offset Declining
Margins, Resulting in Phenomenal Growth in Earnings
$14 $20
$10 $14
$12
$8
EPS
EFCO ($B)
$10
$6
$8
$4 $6
$4
$2
$2
$0 $0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 TTM Q3
'14
-16-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
Googles Stock Has Increased By More
Than 10x Since My Misguided Call
-17-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
I was completely wrong that Google has only a fairly shallow, narrow
moat around its business
Google has a very powerful virtuous cycle at work:
High Large
Barriers User
to Entry Base
Large
Best Network Effects Advertiser
Product Economies of Scale Base
Winner-Take-All
Most Better
R&D Monetiz-
Dollars ation
-18-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
The Bull Case: New Platforms Continue to
Create New Revenue Streams
30
35 Old Revenues:
31% CAGR Desktop
3 Search
-19-
Excerpt from A Google Skeptic Eats Crow, 11/21/14
How Googles Stock Could Double in the
Next Four Years
Note: This slide and the previous two are from the presentation of a friend who wishes to remain anonymous.
-20-
Heres What Alphabet Has Done
Since My 2014 Presentation
Margins Have Remained Stable
90%
Gross Margin %
80%
EBIT Margin %
60%
50%
40%
30%
20%
10%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 TTM Q1
'17
-22-
Strong Revenue Growth Has Continued
$180
($B)
$160
$140
$120
$100
$80
$60
$40
$20
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 TTM 2017 2018 2019 2020 2021
Q1 '17 (e) (e) (e) (e) (e)
-23-
Phenomenal Earnings Growth Has Continued
$50 $70
$35 $50
EPS
$30
$40
$25
$30
$20
$15 $20
$10
$10
$5
$0 $0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 TTM 2017 2018 2019 2020 2021
Q1 (e) (e) (e) (e) (e)
'17
-24-
Alphabets Stock Has Continued to
Rise
-25-
Alphabet Today
Valuation of the Stock Today
-28-
Year-Over-Year Revenue Growth Has Been
Accelerating Over the Past 2 Years
40%
35%
30%
25%
Estimates
20%
15%
10%
5%
0%
-29-
Alphabet Is Not Capital Intensive
Most Cap Ex Is Investing in Growth
50%
40%
30%
20%
10%
0%
Pfizer J&J Apple Microsoft Facebook P&G Alphabet Berkshire Amazon Exxon Mobil AT&T
-32-
The Emotional Aspects of Not Buying Alphabet
Became Clear to Me at the Berkshire Meeting
Buffett and Munger were asked, what have you learned about
investing in technology companies? Munger answered that their
worst mistake in the tech field was not investing in Alphabet:
Well, we avoided the tech stocks, but as we felt we had no advantage
there and other people did and I think that's a good idea not to play
where the other people are better, but you know, if you ask me in
retrospect, what was our worst mistake in the tech field, I think we were
smart enough to figure out Google. Those ads worked so much better
in the early days than anything else. So I would say that we failed you
there and we weren't smart enough to do it and didn't do it. We do that
all the time too.
-33-
The Emotional Aspects of Not Buying Alphabet
Became Clear to Me at the Berkshire Meeting (2)
-34-
The Emotional Aspects of Not Buying Alphabet
Became Clear to Me at the Berkshire Meeting (3)
These comments led me to ask myself why, if Buffett and Munger admit
they failed shareholders and blew it by not buying Alphabets stock
in the past, they didnt fix the mistake by buying Alphabet now?
The simple answer, perhaps, is that Alphabet was cheaper then,
whereas they dont think its cheap enough to buy today
But I think theres more to it than that. If Buffett had bought $10.8 billion
of Alphabet stock instead of IBMs in 2011 and was sitting on a huge
gain (Alphabets stock has tripled since then), I highly doubt he would
be thinking about trimming, much less exiting, this position (even if
there were no tax consequences). Rather, I think hed be delighted to
own ~$35 billion of Alphabet stock right now and would view this as one
of Berkshires permanent stock holdings, like Coca-Cola, Wells Fargo
and American Express
Triggered by this realization, I decided to take a fresh look at Alphabet
and a handful of similar companies
-35-
My Conclusion: Alphabet and Facebook
Are the Two Greatest Businesses on Earth
Ive been following Alphabet for years, so it didnt take long to confirm
my long-held belief that it (along with Facebook) are the greatest
businesses on earth: they dominate their respective industries all over
the world, are growing rapidly, have enormous, sustainable competitive
advantages in the form of brands, habits, and network effects, and have
low-capital-intensive, high-margin businesses models that generate
gobs of free cash flow
Lets take a closer look at Alphabet:
It has seven products with more than one billion monthly average users:
Search, Android, Maps, Chrome, YouTube, Google Play and Gmail
Google Search has 90% share of search in most countries, Android has
~90% share of smartphones globally (vs. 5% in 2010), and YouTube
serves ~20% (and growing) of all video consumed on the internet
Alphabet currently captures 14-15% of global advertising spending
The statistics are similarly mind-boggling for Facebook
-36-
One Additional Data Point
-37-
Alphabet Has Plenty of Room for Growth
-39-
But What About Valuation?
-40-
A Quick Overview of Facebook
Valuation of the Stock Today
Revenue up 49%
Net income up 76%
Operating cash flow up 45%
Cap ex up only 12%
Free cash flow up 61%
-43-
Margins Are Even Higher Than Facebooks
100%
90%
80%
Gross Margin %
70%
EBIT Margin %
60%
Net Income Margin %
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016 TTM Q1 '17
-44-
Revenue Growth Has Been Higher As Well
$90
$80
($B)
$70
$60
$50
$40
$30
$20
$10
$0
2009 2010 2011 2012 2013 2014 2015 2016 TTM Q1 2017 (e) 2018 (e) 2019 (e) 2020 (e) 2021 (e)
'17
80%
70%
60%
50%
Estimates
40%
30%
20%
10%
0%
$35 $12
$25
$8
EFCO ($B)
$20
EPS
$15
$4
$10
$5
$0 $0
2009 2010 2011 2012 2013 2014 2015 2016 TTM Q1 2017 (e) 2018 (e) 2019 (e) 2020 (e) 2021 (e)
'17
Also: Faster, Higher, Farther (Volkswagen emissions scandal; Wild Ride (Uber); Dueling with Kings (fantasy sports); The Attention Merchants
-49-
Start Listening to Books While Driving and
Exercising & Train Yourself to Do So at High Speed
-50-