Motley Fool Hidden Gems Investing - How Do You Value Alphabet?

Episode Date: February 5, 2025

Google – all its apps, smartphones, and the cloud business – is responsible for 99% of Alphabet’s total revenue. But Alphabet is toiling away on quite a few moonshot projects. What if one of them works? (00:14) David Meier and Mary Long break down earnings from Alphabet and Palantir. They also discuss: - Why cloud computing isn’t going anywhere. - YouTube’s secret sauce. - What Palantir really does. Then, (17:45), Ricky Mulvey talks with television writer and novelist Jordan Harper about how PR firms shape public opinion and how to spot their work when consuming the news. Companies mentioned: GOOG, NFLX, PLTR Host: Mary Long Guests: David Meier, Ricky Mulvey, Jordan Harper Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder?

I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount Plus. We're going back to business. You're listening to Motley Fool Money. I'm Mary Long, joined today by David Meyer. David, good to see you. Thanks for being here.

Great to see you too. Thank you for having me. Always a pleasure. The past two days, we've been talking tariffs on the show as that's been dominating a lot of the news cycle, but today we get what seems to be a reprieve from that talk and gives us an opportunity to focus back on companies. We'll start with a familiar name that reported earnings recently, and then we'll hit on something that investors have probably heard about but maybe don't have too many details on. That familiar name is, in fact, Alphabet. Big news with Alphabet earnings is that cloud revenue fell short of analyst expectations, but I want to give a little context to that number because that segment did see 30% revenue growth in the fourth

quarter, brought in $12 billion. A year ago, the cloud unit brought in just over $9 billion in revenue. 30% growth on a couple billion, not a couple, several billion dollars is no small feat. Wall Street isn't pleased. We know that they're pretty obsessed with meeting expectations. David, we take the long-term view. So what say you? Does this kind of result, 30% growth to $12 billion in cloud revenue, does that worry a long-term investor? Nope. Next question. So yeah, we're talking a small miss, but we're also talking a very big market that is only getting bigger. So sure, you might miss a little here, a little there along the way. But at the same time, we know that sometimes you gain a little more here and gain a little more there

along the way. So, on average, the misses and the shortfalls tend to negate each other. But cloud is not going away. I mean, in some sense, it's a little comical that this happens all the time, but it is the nature of the game now, right? It is, what are expectations? I want them to be high. I want this segment of the company to be growing quickly. And so, I came a little short. That's just the way it is. But at the same time, if you have those locked fee expectations and investors have bid up prices, then these little misses can turn into down days like Google slash Alphabet is seeing. Another, I'll say, eye-popping number that came out of this report is that Alphabet plans to spend about $75 billion on capital expenditures

by the end of their fiscal year. That's up from $52.5 billion in CapEx last year. This is a story we talk about all the time. Talked about it last week when we're talking about Meta and Microsoft. It's not new to this quarter. Big tech is spending a lot on CapEx to build out AI infrastructure. But I want to kind of hone in on the comparison among companies here because the narrative that we often share and that we're told when we talk about CapEx is, okay, these hyperscalers have to keep spending. If they want to keep competitive, they got to shell out money. As an investor, okay, if you buy that, then how do you actually take these massive CapEx numbers and put them in context? So, okay, we've got Alphabet saying they're going

to spend $75 billion. As a refresher, Meta said that they'd increase CapEx to between $60 and $65 billion. Microsoft wants to close out their fiscal year, which ends in June, having spent $80 billion. How do you compare these across different companies? These are all massive companies, but is Microsoft's CapEx, quote unquote, better than, is their spend better than Alphabet's just because, hey, they're going to shell out $5 billion more cash? No, the wrong way to do it is to compare the absolute dollars, right? Because again, Google brought in a lot of revenue. Microsoft brought in a lot of revenue. Meta brought in a lot of revenue. They still see demand. That's why they're making the investment.

So, the unfortunate thing is, in order to compare them, we need to see the results down the road, right? In time. Because what we're looking for is not how much did you spend, but it's actually how much did you earn on the capital that you invested? Hence the term, return on invested capital. that's the way to look at how well these companies are doing and we get that from okay how much revenue did you generate how much profit did you generate as a result of you know after all the expenses that you needed to make in order to run those businesses how much cash flow was available as a result of all the profits that you make and it's that cash flow return on investment that is the true demarcation, line of demarcation. If we go back and look at the history of Amazon and what the ROICs that they were putting up when they were building out AWS, they were phenomenal. And that's the reason that they spent billions upon billions upon billions building that business.

We kicked off this conversation by focusing on Google's cloud business. But at its core, this is an advertising company and that business seems to continue to do pretty well. We'll focus in on YouTube in particular. YouTube ad sales brought in $10.5 billion in revenue. That was a record for the company. Relative to other streamers, YouTube dominates viewing on TV, which I am not a YouTube person, so that always surprises me. In December of 2024, YouTube viewing captured more than 11% of TV. Netflix, for comparison, owns about 8.5% of that pie, so streaming that's happening on connected TV. Worldwide, users watch more than a billion hours of YouTube content on TV each day. What does YouTube understand about video that maybe other

streamers could imitate? They know what their viewer wants. It really does get as simple as that. So I'm going to use myself as an example and try to bring some light to my comment. So I'm a golfer. I go to YouTube and there are a couple of content creators who talk about the golf swing and how you can make improvements. I like music. So I tend to click on things about guitar or new bands that I just heard of and see what they have to offer. Things like that. I like snowboarding. So I just got back from a snowboarding trip. So I was like, hey, let me go see what kind of cool things people are doing on their snowboards and you know who knows exactly what i want youtube it's amazing right they they see what i have they see what i look at

and in my feed there are always new things for me to watch that's the beauty of it that's actually the beauty of netflix as well netflix knows what people want to watch and not only do they put that in front of them, you get basically a curated list of things. Hey, this might be something you might be interested in. But like Netflix and for YouTube, it also is a way of feeding back information to content creators. If your content is something that people want, then YouTube will say, hey, essentially make more of this. We'll make it worth your while. We'll share some of that advertising revenue with you. So the whole thing is one giant feedback loop. And it is absolutely incredible to see that these two companies are essentially 25% of TV usage,

right? Streaming TV usage. That's amazing. And it's because, again, they have the algorithms that know how to see what people are viewing, translate that into what people might want to view in the future, send that signal out to content creators so they can create an incentive for them to create more content and just keep going and going and going. All these business segments that we've talked about today roll up into Google, but Alphabet is more than just Google, right? Almost all of Alphabet's revenue comes from Google. And again, that includes not just the cloud segment, not just YouTube, but Maps, Gmail, Drive, smartphones, so much of what we think of when we think of Alphabet. But again, there's more to this company

than just Google. With that in mind, how do you value a company like this? There's a lot of moonshots that Alphabet's working on, and the results of those are to be determined. Is that baked into the stock price today? How do you think about that as an investor in this company? So that's an awesome question, and it's actually one that investors have debated for many years. And it was interesting. I'll take you back to when Ruth Porat came on as CFO, and she was like, basically, we are going to be more disciplined in how we invest capital. And some of those moonshots that were actually cordoned off into a ventures business, they actually didn't get funded. Some of them lost their funding, but not everything does. But the reason I say that is because

Google is essentially, the best way to value Google, in my opinion, is essentially to do a some of the parts, right? To take its brands that have individually, the last I checked, there were at least like 12 or 15 properties that had a billion users. So that's a business in and of itself, right? If you wanted to, you could spin that off and it would live on its own. So essentially, you take those properties and to the best of your ability, you see what comps you can find. You take the information that Google has been, it gives you in all of its public filings and you try to figure out what each individual property is worth and then add them up at the end of the day. And then you come to things like, okay, Waymo used to sit over in the venture side

of things. There was stuff about how do we lengthen human lives? We're making investments there. So, there's all these other things. That's essentially an option. It's a call option. How much value you assign to that, well, you could probably do a little bit of math. But essentially, it's the properties that are more mature, generating revenue, generating cash flow that deliver the bulk of it. And as those moonshots start to show signs of life, that's when you can start saying, OK, well, if I know how much I'm paying for these mature properties, if I get this moonshot for free or, I don't know, for a dollar in terms of stock price, is that call option worth taking?

Sometimes it is. Essentially, to wrap that up, it's the value of the mature properties plus whatever option value you assign to the ultra long-term investments that are making. That's what makes up the overall value of Alphabet. Anything else that you want to call out from alphabet earnings or that stuck out to you before we move on to our next story of the day? I will just say the stock is off today. This is one of those situations where Google is doing so many things and is moving, in my opinion, in a good direction forward. It's these dips that can provide opportunity. So I would just say to investors, even though Google is a multi-trillion dollar company. It's still doing amazing things, expecting

double-digit growth, low teens growth for the next two to five years. That's a pretty incredible opportunity for a business this size. So I would just say keep an eye on it. And it's the cheapest of all the Magnificent Seven stocks, I believe that's worth mentioning too. Yeah. Speaking of doing great things, we'll move on to Palantir, which is moving. You mentioned that Alphabet is down a bit today. Palantir technology was up 24% yesterday and up 40% since the start of the year. The Morning Brew wrote on X, Palantir being up 25% today, they wrote this yesterday, is even more impressive when you consider that 100% of their investors have no idea what it actually does. David, I've called you into the chat to help

out those investors. Tell us, what is it that this mysterious company actually does? Oh, I'm so happy to help here. So, the way to think about Palantir is that Palantir has developed a technology platform that essentially helps companies analyze their data for a fee at a 30,000-foot level. That's what the company does. So, whether it's optimization and whether it's analytics, whether it's AI, whatever it is, the goal of Palantir or its mission is to say, hey, you as companies, you have all this data, let us help you make better decisions, get more out of it, improve your customers' experience, all these things. That's what Palantir just lives to do.

I think the most interesting example, and I love to tell this story when I first learned about Palantir was the Formula One race car. They work with Ferrari. Ferrari basically made a marketing video, so it was designed to be sensational. Ferrari said, look, Palantir in real time helps our car get around the track faster. Formula One racing, we're not talking, hey, let's find two seconds, let's find five seconds. We're talking tenths of seconds. and so in in this partnership they were taking all the data from the car running it through analysis and basically saying hey make these adjustments to the car tell tell the driver this is what you can do you're a little slow here you're a little fast here your fuel efficiency's

here change the pressure in the tires all these things and they're essentially happening in real time to help Ferrari win a race. You can extrapolate that to any business. You're not necessarily driving a race car, right? But you want your business to get better. You want your business to get stronger. You want your business to grow faster. And that's what Palantir does. That example is such a good one to hear because I think depending on your affect, you can hear the words data analysis and AI and either get really excited about that potential, or you can be cynical because it sounds like a bunch of buzzwords, right? That said, Palantir stock is valued at over 170 times forward earnings. If you're somebody listening and

you're looking out and you're seeing this wild news cycle that we're sitting in the middle of and you're sitting on the end of all this market uncertainty and the ups, downs of the corrections of the back and forth that we saw earlier this week, and you see this stock that shoots up, you see an immensely confident CEO. And what do you say to the listener who sees all that and says, oh, I want to ride that race car? No, no. So again, another great question. And it is without a doubt that Palantir is doing amazing things in terms of the growth of their own business, how they're helping their customers, whether they're commercial or in the private sector or the public sector helping governments. You can have your own opinion of Alex Karp. He's

a unique individual and very passionate about this industry. But let's just go back to something that Warren Buffett always says, and price is what you pay, value is what you get. Right now, we just need to be careful. This stock has been bid up. So if you look at the valuation, right? We can see that the market essentially says, this company is going to continue to do amazing things, and it's going to turn those amazing things into more revenue, more profits, more cash flow. And we just have to decide, as investors, is the risk of potentially losing money worth the returns that are embedded in the stock price? I would say that the risk is probably higher than the returns right now, given these prices. But that does not take away from the fact

that, again, what Palantir is doing, where it's doing it, the industry that it plays in, amazing things. I would have to say it's better for investors to be patient right now. David Meyer, always truly wonderful to have you on the show. Thank you so much for demystifying Palantir for us and for reminding us of the age-old adage that Patience is a virtue. You're very welcome. Thank you for having me. Ever notice when a bunch of different publications start talking about a one-snitch topic and

all start covering that topic from a pretty similar angle? You may be looking at the work of a black bag or crisis PR firm. Up next, Ricky Mulvey talks with television writer and novelist Jordan Harper about the world of public relations and how not just celebrities but corporations try to shape the public discourse stop wasting your nights on a mattress that doesn't get you experience the most comfortable mattress in the world the sleep number smart bed at the touch of a button you can personalize your comfort choose firmer or softer adjust cooler to warmer and right now save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today,

because we have your number. The angle we're getting into is about crisis public relations, black bag PR. It's central to your book, Everybody Knows, which is the Hollywood angle of it. But I think the fundamentals of this are actually applicable to our investing audience, because investors are going to see the work of crisis PR firms in the companies they follow, especially when things go awry, anytime a company needs to spin a story or change public opinion on something. We'll get into it a bit later, but I'm immediately thinking of big food. Before we get to all that, to set the table, what got you interested in the world of crisis public relations? How did you see it?

Well, as you mentioned, I am a writer and producer for television alongside my novels. And I was working on a pilot based on James Elroy's novel, L.A. Confidential, which is one of my favorite books and very applicable to what I write about. And we were making it for CBS. And during the time we were filming it, we started to hear rumors and whispers that there was going to be a big article that was going to come out about the head of CBS, Les Moonves. And we thought it was going to blow up the network. And we just waited and it didn't come.

And then, you know, we filmed the pilot. We got it done. It did not go to series. Lesbian Vez did not pick it up. And then a few months after that, the article did come out. It's a very famous Ronan Farrow. And a lot of this stuff came out in Ronan Farrow's book, Catch and Kill. But having kind of been on the inside of it and watched it play out from the inside made me very aware of how much working in Hollywood I had learned secrets that didn't make the light of day or made the light of day years later.

And also working on L.A. Confidential, which is an amazing epic neo-noir set in the 40s, I wanted to take that energy and tell a story set right now in Los Angeles. And it occurred to me that a crisis PR manager is actually a perfect like neo-noir character to tell a really dark, twisted story about the modern world. So I know when you're researching stories, while you're writing fiction, you're trying to pull a lot from reality. I think one example is you followed police scanners around just to see what's going on in the city of Los Angeles to gather inspiration for your work. When you were researching the crisis PR industry, the people that work in it, what was some of the work you did to find out about what they do? Well, you know, I did the basic things you do, you know, starting with Wikipedia, which

I bring up because I do encourage people to go read the Wikipedia page for crisis management and crisis communication. And the reason I recommend it is you will read it and you will see that it has clearly been written by crisis managers and crisis communication specialists because controlling information is the key to what they do. Not just information, but the phrases used, the words used. And it's a great example. But, you know, I did go beyond that. Obviously, like I said, I worked in Hollywood. I still do.

And I had talked to a lot of people who had been in bad situations and I talked to those people and learned how it was handled. And then I did reach out and sit down with some black bag PR people for some really odious men here in Hollywood. And they were very open with me. And, you know, obviously I can't name them. I gave them confidentiality. But, you know, they were very blunt about the tools they use and what they do. Let's get into some of those tools. One thing that these crisis PR agents need to do is build relationships with journalists at very large media organizations.

What did you learn about how they accomplished building those relationships? Well, you know, it's something you can see in politicians and reporters in Washington. You can see it in L.A. with entertainment reporters. Access is a key thing that all reporters need. They need people to talk to. They need to be able to get inside. And they can't burn those bridges because they need constant access to access. So cultivating those relationships, just treating reporters like human beings, very little of

this is done in back alleys. Very little of it is said out loud. It's just you form the relationships, you become friends with the people, and then they treat you like friends. And you can trade on that. You can trade on your access to the powerful people you protect. And you build this network and you use that to set the narrative. There's a very famous idea in crisis management called the lead steer theory.

And once you're aware of it, you'll start to see it all the time, which is the concept of the lead steer theory. And this was said to me in very blunt words by a black bag PR person, the press are cattle. So what you want to do, they told me, is find a lead steer. Tell your story to that lead steer. Now, that's a big media organization. The New York Times was given to me as the absolute best lead steer you could find. you feed them your story, you get them to publish it with your take as kind of the lead take. And

now you have set the tone for all the stories that are going to follow because every reporter who researches this is going to start with the New York Times. Now, it doesn't have to be the New York Times. It just has to be a big publication. But when you can set the tone, then you've kind of already won the war. So that's a big part of what they do. And a lot of media is sort of drawing off what other, you know, what other journalists are doing, especially when you're trying to make so much stuff. So after I read your book, Everybody Knows, which I've recommended on the show and I really enjoyed it. Jordan, it was one of those books where I felt myself slowing down reading just as a general reader. And I found myself gaining

momentum ripping through the pages of that book. So thank you for that. It's that kind of gripping read. Thank you. I think I'm seeing this pattern, especially for big food. We have this big debate around ultra processed food. And I think there's a general trend where people in the United States want to eat healthier. They're thinking more about what's going into what they eat. And I don't think that the big processed food companies are taking this lying down. Now, here's a few examples of what I've seen. One is in The Atlantic. There's an article where it's like Coke, Twinkies, Skittles, and whole grain bread. Who's to say what ultra processed food is because there's an ingredient in whole grain bread that could count it as ultra processed food.

There's also a Wall Street Journal article where it's highlighting this NIH study finding these interim results where 18 people are reporting that they're feeling just as full and satisfied on an ultra-processed food, diet-processed food, and whole healthy foods. I'm getting to this with the lead steer PR strategy, because what I'm starting to see is maybe the work of crisis PR agents trying to sow confusion, trying to sow doubt in the American public for things that maybe they know intuitively is true. If you eat a piece of beef, it's going to make you feel full in a different way than a meal from McDonald's will. And I think I'm seeing the work of crisis PR here. And that's one of the reasons I wanted to bring you on the show. So I'll bounce that off you. Could there be crisis PR at work with a lot of these big food companies trying to combat this trend? Well, I think in the large sense, yes,

I do want to differentiate. Crisis PR is usually done in the face of an actual crisis to be dealt with. But black bag PR can cover a lot of different aspects, including what you're talking about. And the history of food industries manipulating the press in America goes back decades and decades. And they work hand in hand with, you know, scientists who they fund the studies of. They also have access to a thousand studies, but they're only going to write articles about one. A very famous example of this is the battle between sugar and fat that has occurred in our diets in America and how the entire fat-free craze was powered by black bag PR about people highlighting a single study that suggested that fat was what was causing so many of our

health problems when a large majority of studies suggested it was in fact sugar. The difference between fat and sugar is fat appears in a lot of different foods, but there isn't such a thing as big fat. Sugar, however, has a very powerful voice behind it. And so, yes, you do see this kind of black bag PR work in big food. And I think your examples are exactly right. And the thing you have to ask yourself, when you encounter the media, you can't let this knowledge of media manipulation shut you off from the news. It just means you have to become a more sophisticated consumer of news. And the first thing you have to ask is, you know, the famous phrase, qui bono, or who benefits? Who benefits from this article at this moment? Who suggested it? If you ask me, I think it should be

just a tenet of reporter ethics, that any contact with a publicist should be mentioned in the article. Because how is that not news? How is it not news that this idea for an article was brought to you by somebody with a vested interest in this story being told? And I think, you know, the basic thing at work here is a weaponization of the contradictions inherent in so-called objective news gathering. Reporters have to put on a false identity of objectivity because no one is truly objective. And to do that, they have to kind of contort their beliefs and they have to give both sides a voice. They have to allow for crazy ideas to be presented and they can't just say, oh, and hey, here's a crazy idea. We're seeing it more and more. And absolutely, corporations

have to engage in this sometimes. Well, they don't have to. They choose to. They would say they have to in order to protect their shareholders. But I think there's a lot of different ways to protect your shareholders. I could give you an example of the alternative if you'd like. Go for it. People look at crisis PR as something that came out of the 80s in a lot of ways. And there are kind of two case studies you can look at. There's Three Mile Island, which is a terrible environmental disaster that was caused by, you know, corporate malfeasance. And it was covered up and they used pressure to try and keep the story in. And the alternative to that is the Tylenol murders, where a man in Chicago was dosing bottles of Tylenol with cyanide and people were

dying. And instead of covering anything up or denying responsibility, even though they truly weren't responsible, Tylenol made the choice to settle with all the victims, to take full responsibility, to pull Tylenol off the shelves. And they handled it in just an open and honest way and Tylenol is fine. Everybody still takes Tylenol. They solved the problem through honesty and admitting that it was a problem. It's when corporations choose not to do that, that they engage in the cover-ups. I want to get back to the listener, those consuming media. You said one thing to ask as you read news is who benefits. And you also don't want to dismiss all journalism out of hand with the cynical view that everything is controlled

by black bag and crisis PR. But for those listening, what are some signs that they're seeing the work of crisis PR or black bag PR in the news they're watching or the news that they're reading? Well, I think that the number one thing to look for, and it's a tricky thing to look for because it's invisible, is what are the questions that aren't being asked? And what are the ideas being assumed without being questioned? What's missing? And that is the trickiest thing to think about if you're not very familiar with the subject, I will say a great thing to do to kind of educate yourself on this is to look up some news articles if you're able to on something you are tremendously familiar with. As somebody who's worked in Hollywood, I've had an opportunity to do

this a lot reading, you know, articles in the trades about TV shows I've worked on. And I can always see the gaps and I can always see, I can see what's missing and I can see what's wrong. and the trick is to turn the page and read the next story and assume every gap and mistake that was in that story is in this one and again without dismissing it outright i know that there's a trend now to dismiss legacy media as like some wholly owned or wholly constructed entity and that's cope that is that's weak-minded it's just silly and um but you can say that and still say it is all shaped, it's all controlled. And, you know, look for things like statements that were released by a publicist. You have to ask yourself, did the person that this statement is being attributed to

even read this statement before it was published? The answer is often probably not. Be aware of that. Look for things that sound like PR speak coming out of the mouths of people who shouldn't be speaking that way. And again, look for the agendas that aren't being stated. Look for the assumptions and look for trends the way you're pointing out a trend. While there's been five article saying ultra processed food is good for you. Well, that seems fishy. Well, that is fishy and be aware of it. And again, that doesn't mean any one fact in the article is false or the idea is false or that idea is false, obviously. And again, the other thing to think about is specifically who is powerful and who has the money and means to shift narratives that could profit

from this take. And you can't just wave your hands and say, it's rich people. You can't just wave your hands and say, it's the elites you have to find. These people have names. And that's what you want to know is who with a name is benefiting. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you.

For David Meyer, Ricky Mulvey, and Jordan Harper, I'm Mary Long. Thanks for listening. We'll see you tomorrow.