Google went public 12 years ago today (Aug. 19), and while the company has changed its name, after expanding into different product lines and services from its original internet search specialty, what hasn’t changed is its ability to keep growing and enriching its loyal shareholders.
The Mountain View, Calif.-based company changed its name to Alphabet Inc. in October 2015. That followed a split into two share classes in April 2014. The Class A shares still trade under the familiar GOOGL, -0.39% ticker, while the Class C shares trade under the GOOG, -0.27% symbol. The reason for the split was to enable Google’s co-founders, Larry Page and Sergey Brin, to maintain control over the company. Only Class A shares have voting rights, while all newly issued shares are Class C.
Here’s how Alphabet’s Class A shares have performed since Google’s initial public offering on Aug. 19, 2004, compared with the S&P 500 Index of the largest U.S. stocks:
Alphabet’s shares have returned 1,499% since the initial public offering, easily exceeding the 158% return for the S&P 500 SPX, -0.14% with dividends reinvested. Alphabet doesn’t pay dividends, but long-term shareholders aren’t complaining.
Here’s how Alphabet (and formerly Google’s) earnings per share have grown since the IPO, compared with the S&P 500 and software giant (and one-time tech bellwether) Microsoft Corp. MSFT, +0.03% :
The 12-year performance comparisons might be unfair
Google earned $399.1 million in 2004, its first year as a publicly traded company, while Microsoft, a much more mature company, earned $8.2 billion. So the above 12-year comparison of earnings growth may not be entirely fair because the much smaller Google was able to increase profits in leaps and bounds.
So here’s a comparison of Alphabet’s growth of earnings per share over the past five years, to that of Microsoft and the S&P 500:
Finally, here’s how Alphabet’s stock has performed against Microsoft and the index over the past five years:
Alphabet’s recent success
So what do we want to see out of Alphabet, or Google, or whatever we call this amazing company at this stage?
Continued expansion is nice, with sales growing. We also want to see earnings increasing and profit margins widening. The good news continues to flow.
Sales per share (SPS) are growing:
SPS – Q2, 2016 SPS – Q2, 2015 Growth of quarterly SPS SPS – Past 12 months SPS – year earlier 12-month SPS growth
$30.74 $24.98 23% $116.55 $99.64 17%
In case you’re wondering why we are not showing separate sets of figures for Class A and Class C shares, it’s because the figures are pretty much the same, because of adjustments Alphabet makes in its financial statements.
Earnings per share (EPS) are growing:
EPS – Q2, 2016 EPS – Q2, 2015 Growth of quarterly EPS EPS – Past 12 months EPS – year earlier 12-month EPS growth
$7.00 $4.93 42% $25.81 $20.02 29%
Gross margins are improving:
Gross margins – Q2, 2016 Gross margins – Q2, 2015 Gross margins – Past 12 months Gross margins – year earlier
62.05% 61.73% 61.83% 61.78%
A company’s gross margins are its sales less the cost of goods or services sold, divided by sales. It’s a raw measure of profitability that doesn’t reflect overhead expenses.
Net income margins are also improving:
Net income margins – Q2, 2016 Net income margins – Q2, 2015 Net income margins – Past 12 months Net income margins – year earlier
22.77% 21.64% 22.14% 21.43%
Net income margins are earnings divided by sales, with adjustments for foreign-exchange contracts.
So even after so many years, Alphabet’s sales and earnings are growing by double digits, and its profitability is also improving.
Analysts still love the company
Among 46 sell-side analysts polled by FactSet, 42, or 91%, rate Google’s Class C shares “buy,” while the rest have “hold” ratings. The consensus price target is $937.95, implying 21% upside over the next 12 months from the closing price of $777.50 on Aug. 18.
That’s a big increase from the $85 that an investor could pay for one share on Aug. 19, 2004.