FLASH NOTE – ALPHABET MAY 13TH, 2020 Alphabet (Ticker: GOOGL US) Price and Performance (Values in USD) Price 1385.40 Description 52 Week High 1530.74 Alphabet is the conglomerate that resulted from the 2015 restructuring of the company 52 Week Low 1008.87 formerly known as Google. Alphabet is now divided into Google – which manages the YTD 3.4% Google search engine that has expanded to a whole ecosystem which includes e-mail Average Daily Volume (mn) 2,141,661 (Gmail), cloud, video (YouTube), a mobile operating system (Android), etc.; and other bets Market Cap (mn) 947,035 – includes subsidiaries such as Verily, Calico, Waymo, and Google[x], among others (12 in Beta 0.89 total). Google is the money maker of Alphabet (99% of revenues), operating on a revenue EPS 49.59 generation system sustained by advertising revenues and subscription (cloud) revenues. Source: BiG Research; US Alphabet has a three-tier stock structure, composed of: class A (ticker GOOGL), which trade Alphabet Inc in the NASDAQ stock exchange and have one voting right per share; class B which are held Ticker MyBolsa/website BiG GOOGL by insiders and do not trade in public markets and have ten voting rights per share; and Ticker BiGlobal Trade GOOGL class C (ticker GOOG) shares who also trade in the NASDAQ stock exchange but have zero Ticker BiGTrader24 GOOGL voting rights. Class A and C shares were created through a stock split in 2014. Ticker BiG Power Trade GOOGL P/E Ratio 2020E 27.47 Revenue Per Geography Alphabet's Revenue Division Google's Revenue Division P/BV Ratio 4.65 Other Other Bets EV/Sales 4.17 Americas Cloud 1% 11% Source: BiG Research; 5% APAC Other Consensus (last 5m) 17% 7% Buy 41 United States Hold 3 EMEA 45% Sell 0 Google Advertising 33% 82% Source: BiG Research; 99% Financial Information Sales (USD mn) 161,857 Source: BiG Research EBITDA (USD mn) 47,832 Nº of Employees 118,899 ROA 13.3% Coronavirus Impact ROE 17.8% Dividend Yield 0.0% - In March 2020 Alphabet experienced a decline in advertising revenues due to the Source: BiG Research; impact of COVID-19 and the related reductions in global economic activity. There were two main reason for this decline: 1) users’ search activity increased, yet their interests Credit Ratings shifted to less commercial topics; 2) reduced spending by advertisers in response to Agency Rating Outlook the macroeconomic impact. S&P AA+ STABLE - The company also assessed the realized and potential credit deterioration of their Moody's Aa2 STABLE customers due to changes in the macroeconomic environment, which has been Source: BiG Research; reflected in an increase in allowance for credit losses for accounts receivable. - Looking ahead, the full impact of COVID-19 on the business is unknown and highly Notes: unpredictable, and historical trends in revenues, operating income, etc., may differ All quotes were updated in Bloomberg at materially. 15h20 of May 11th, 2020. - In addition, many expenses are less variable in nature and may not correlate to changes in revenues. The extent of the impact will depend on the duration and Relevant Information: severity of the pandemic as well as the macroeconomic impact of government Use the following link to view our most measures to contain the spread of the virus. recent publications: - To address the potential impact on the business, over the near-term, the company is https://www.big.pt/InformacaoMercado revaluating the pace of investment plans (ex. hiring, investments in data centers, s/TradingIdeas/Index/-1 servers, network equipment, and marketing and travel spending. Alphabet did not disclose specific costs and investment reductions, norther how the impact of COVID- Use the following link to see our 19 will affect the stock repurchase program recommendation history: https://www.big.pt/pdf/Newsletters/nld.pdf Analyst: This document has been prepared exclusively for informative purposes, and is based on publicly available information, retrieved from sources deemed trustworthy. BiG does not assume any responsibility for the full correction of the information provided, and the information here provided should not João Calado, CFA be interpreted as an indicator that any results will be achieved. We emphasize that the projected results are susceptible to alterations due to changes in the assumptions that have served as basis to the information here provided. We forewarn that the previous performance of a security is not a guarantee of identical performance in the future. Changes in exchange rates of securities denominated in a currency different from that of the investor With the contribution of: may lead to a negative impact on the value, price or return of such securities. BiG, or its employees, may have, at any moment, an investment, Francisco Fonseca subject to alterations, in any security mentioned in this document. BiG may provide additional information, if so is requested. This document is not a sale proposal, nor a purchase solicitation for the subscription of any securities. BiG ensures independence in investment recommendations under the terms of points 7.23 and 7.24 of BiG's Conflict of Interest Management Policy. BiG continuously monitors the recommendations issued by analysts Research: under the terms of the Code of Conduct and Personal Transactions Policy. [email protected] 1 FLASH NOTE – ALPHABET MAY 13TH, 2020 Investment Thesis Search Ad Spending Share % Exposure to online advertising: Google’s search engine and its portfolio of apps are one of the most popular mediums of online advertising, with the company having around 82% of total revenues (1Q20) coming from advertising. Nowadays, Ad Mobile already surpassed Desktop, and the new gap is expected to increase over the next years. Further, Search Media Advertising and Social Media advertising will continue to be the growth drivers of Desktop this industry. It is a certainty that the COVID-19 will affect the Ad Spending on a short-term 48% Mobile 52% horizon, nevertheless, the recovery, as well as the long-term impact, is still unclear. Since these costs are flexible, the market is expecting a fast recovery, rather than a gradually extended one. Forecast for Ad Spending before COVID-19 (USD bn) Source: BiG Research; Statista 200 20% 150 15% 100 10% 50 5% 0 0% 2019 2020 2021 2022 2023 Classifieds Video Advertising Social Media Advertising Banner Advertising Search Advertising Growth YoY Source: BiG Research; Statista Cloud Services: Google has the 3rd highest (but still low in absolute terms) market share of public cloud, followed by Microsoft and Amazon, which is currently the undisputed leader. Yet, since the market is expecting strong growth in the next years, Google will be able to benefit from this upward trend of the industry, even if the market share remains stable at medium single digits. The cloud revenues already account for 11% of total revenues (1Q20). FY2019 FY2018 Annual Cloud service provider USD bn Market Share USD bn Market Share Growth YoY AWS 34.6 32.3% 25.4 32.7% 36% Microsoft Azure 18.1 16.9% 11.0 14.2% 64% Google Cloud Platform 6.2 5.8% 3.3 4.2% 88% Source: BiG Research; Canalys Hardware: Alphabet has expanded its portfolio by including hardware products, as the Pixel Phone, the Pixelbooks and the Google Nest home. While Pixel phones are still quite small in the smartphone market, in 2019 the Google Nest home had the 2nd largest market share (30.9% vs 23.9 in 2018) of the US smart speaker market. Other Bets This segment, while still being a money losing unit, can create several potential revenue sources in the long-term future. One of the ‘main bets’ is Waymo (formerly known as Google Self-Driving Car Project), has introduced the latest fifth-generation “Driver” suite of hardware and software that basically allows a car to be driven without human input. The first test vehicle to have Waymo’s new ‘Driver’ suite of sensors and software is the electric Jaguar I-Pace. Further, Verily, the “bet” that generates more revenue within the segment, has been developing a web site, alongside with the White House and public companies, that lets consumers identify the symptoms and risks associated with coronavirus, and the nearest locations where testing is available. Analyst: This document has been prepared exclusively for informative purposes, and is based on publicly available information, retrieved from sources deemed trustworthy. BiG does not assume any responsibility for the full correction of the information provided, and the information here provided should not João Calado, CFA be interpreted as an indicator that any results will be achieved. We emphasize that the projected results are susceptible to alterations due to changes in the assumptions that have served as basis to the information here provided. We forewarn that the previous performance of a security is not a guarantee of identical performance in the future. Changes in exchange rates of securities denominated in a currency different from that of the investor With the contribution of: may lead to a negative impact on the value, price or return of such securities. BiG, or its employees, may have, at any moment, an investment, Francisco Fonseca subject to alterations, in any security mentioned in this document. BiG may provide additional information, if so is requested. This document is not a sale proposal, nor a purchase solicitation for the subscription of any securities. BiG ensures independence in investment recommendations under the terms of points 7.23 and 7.24 of BiG's Conflict of Interest Management Policy. BiG continuously monitors