Alphabet Incorporated Information Technology

Internet Software & Services

Analyst: Saul Ellison 10/14/16

2

TableofContents

TearSheet..............................................................................................................................2

InvestmentCase.....................................................................................................................4Recommendations.....................................................................................................................................................................4

CompanyOverview................................................................................................................5

FinancialAnalysis....................................................................................................................6A. LiquidityRatios............................................................................................................................................................6B. AssetManagementRatios.......................................................................................................................................6C. DebtManagementRatios.........................................................................................................................................7D. ProfitabilityRatios ....................................................................................................................................................7E. MarketValueRatios...................................................................................................................................................8

Sector&IndustryOutlook......................................................................................................9

Risk&Reward......................................................................................................................10

Summary..............................................................................................................................11

Appendix..............................................................................................................................12

3

TearSheet

4

InvestmentCase

Recommendations Alphabet Inc. has become a juggernaut multinational conglomerate encompassing several high growth industries including technology, life sciences, capital investment and research. The investment case for Alphabet Inc. can be summarized as follows: 1.) Competitive Advantage: Alphabet Inc enjoys a myriad of competitive advantages in it’s primary core businesses that have allowed them to exceed, thrive and withstand the constant fluctuations, evolutions and trends that happen in the technology world that has started to transcend it’s own industry and into other fields like never before. Dominance in web search, video content sharing, online advertising, mobile OS, browser usage and many other markets are major hallmarks of Alphabet Inc.’s flagship business Google. Google is an Internet company that primarily competes in the web search and online advertising markets. However, the company’s product portfolio is very diverse and includes both related and unrelated hardware and software products and services. Google dominates most of the markets it operates within. Strong and ever growing brand awareness gives the company an unparalleled market leadership and immense brand leadership allowing it power over customers, suppliers, and competitors.

2.) Interconnected Software/ Hardware Ecosystem: Google has displayed its vision for a more ubiquitous and conversational way of interacting with technology. Its Assistant is chattier, answering natural language queries with a more human voice, and it’s found its way into several new Google products: the messenger Allo and the Echo-like speaker Home. Both are areas where other companies have a lead, but Google’s strength in AI gave these services some nice twists, doing things like automatically generating surprisingly specific reactions to photos. Google has rolled out a long-term platform and Alphabet Inc.’s other subsidiary segments in various stages of research such as self-driving cars, smart urban infrastructure and development in Cloud computing has allowed to facilitate for an interconnectedness not only in people, but in the various technology products that go past just phones but into everyday life. 3.) Information Analytics: Google Search is the company’s search engine that people use to find information online. It’s the most widely used search engine in the world with a 67.86% desktop market share and more than 90% share of the mobile segment. Google’s search engine domination is especially prominent in Europe with the company having more than 90% market share in both the desktop and mobile market segments. Google receives an enormous amount of information about its users and their habits through Google Search, Google Analytics, YouTube, Android OS, Chrome and its other products and services. This information provides Google with a key competitive advantage. Google can target advertisements or adapt its products to its users’ needs better than any competitor, because it has both smarter algorithms and much more information about its users. 4.) Online Advertising: Google’s main source of revenue is its advertising business. In 2015, advertising generated US$67.4 billion or 90.4% of the company’s total revenue. According to eMarketer. Google earns more than 30% of the world’s digital advertising revenue, 4 times as much as the next largest earner, Facebook. The company dominates the digital advertising

5

market through many different channels, including its own AdWords advertising program, AdSense, YouTube and the Android OS. By dominating the online advertising market Google can better understand current advertising trends, collect an enormous amount of information about online users’ shopping habits, and enhance their related services by improving targeted advertisements. 5.) Growth in Virtual Reality & Augmented Reality: The potential in virtual reality presents a massive upside in the next decade and coming years the amount of research and development donated toward virtual reality as well as the potentially even more profitable, augmented reality puts Alphabet Inc.’s primary business core in a unique situation to capitalize on this emerging growth. AR now appears largely focused on enterprise users this year, with most consumers AR expected to launch around 2017 (although wild cards like Magic Leap could change that). AR now forecast to hit $90 billion by 2020. VR’s topline remains largely unchanged, with $30 billion forecast by the end of the decade. The timing change also moves the tipping point for AR passing VR from 2018 to 2019.

CompanyOverviewAlphabet Inc., incorporated on July 23, 2015, is a holding company. The Company holds interests in Google Inc. (Google). The Company's segments include Google and Other Bets. Google segment includes Internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome, Google Play, and hardware products, including Chromecast, Chromebooks and Nexus, which are sold by the Company. Its technical infrastructure and Virtual Reality are also included in Google segment. Google segment is engaged in advertising, sales of digital content, applications and cloud services, as well as sale of Google branded hardware. The Other Bets segment consists of various operating segments and includes businesses, such as Access/Google Fiber, Calico, Nest, Verily, GV, Google Capital, X and other initiatives. Other Bets segment is engaged in the sale of Nest hardware products, Internet and television services through Google Fiber, and licensing and research and development (R&D) services through Verily. Rapid growth since incorporation into a holdings company in 2015 has triggered a chain of products ad partnerships beyond the Google search engine. It offers services designed for work and productivity (Google Docs, Sheets and slides), emails, scheduling and time management (Google calendar), cloud storage date (Google Drive), social networking (Google+) and instant messaging and video chats just to name a few of their diversifiable segments. Alphabets largest subsidiary being Google but is also the parent company of Calico, GV, Google Capital, X Google Fiber, Jigsaw, Sidewalk Labs, and Verily. While many companies or divisions formerly were a part of Google, they became subsidiaries of Alphabet while Google remains the umbrella company for Alphabets internet-related businesses. This also including YouTube.

6

FinancialAnalysis

The major financial statements help to give better financial understandings to both external and internal users to help track, trend and forecast where the company is heading, where they have strengths as well as what their weaknesses are. The Income statement provides revenues and expenses incurred generating those revenues in a period of time through both operating and non-operating activities. The statement of cash flows provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter. The balance sheet is a snapshot in time of a company's assets, liabilities and shareholders' equity.

A. LiquidityRatiosLiquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. It’s a process that can be done by comparing a company's most liquid assets (or those that can be easily converted to cash) to its short-term liabilities. Analyzing Alphabet Inc.’s, we observe the current ratio, which stands at 4.67 in 2015, with an estimated 5.43 to finish the 2016 fiscal year. 2013 to 2015 the ratio held steady near in the 4.6 to 4.7 ranges, but had increased significantly for the 2016. This increase generally trends positive towards the company’s growth in assets relative to their liabilities, which indicates rapid internal growth. Although this alone isn’t indicative, it’s clear they aren’t in range to indicate a inefficient use of assets (which may lead to an extremely high ratio.) The quick ratio (although Alphabet is primarily a software company, meaning little inventory) has experienced similar gains. Their cash from operations is estimated to finish 2016 at 1.7 whereas the last 5 years dating 2012 have remained consistent around 1.2. It is measuring the amount of cash; cash equivalents or invested funds there are in current assets to cover current liabilities. The company has more cash and cash equivalents than current liabilities. In this situation, the company has the ability to cover all short-term debt and still have cash remaining.

B. AssetManagementRatiosAsset Management Ratios attempt to measure the firm's success in managing its assets to generate sales. For example, these ratios can provide insight into the success of the firm's credit policy and inventory management. These ratios are also known as Activity or Turnover Ratios. Being a tech company primarily in its central business core, Alphabet doesn’t currently maintain any overriding inventory. This is expected to change in the coming years at it’s diversifying is revenue stream by reattempting to enter the hardware aspect of the industry through the sale of phones and etc. Ignoring this, we look at the Days sales outstanding (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. This has actually decreased over the years to 47.18 based on 2016 estimates coming down from 52.91 in 2012. As this is correlating with expanded revenue streams this decease seems to be on a constant trend. The Fixed asset turnover rate indicates how well the business is using its fixed assets to generate sales, similar with the total asset turnover. Generally speaking, the higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets. Yet, this ratio can vary widely from

7

one industry to the next. When analyzing the tech industry for comparative values we realize from 2012 to 2015 (actual values), the fixed asset turnover actually decreased from 4.29 to 2.8 which could signify an overinvestment in Property, Plant and equipment but this is typically a small number in general when it comes to tech companies. The total asset turnover however has maintained steady over the past 5 years to .55. This is very telling, because as the assets of Alphabet Inc has considerably grown, it is in relationship with the growth in revenue and it shows an extremely consistent makeup indicating revenues have grown accordingly with the increases. The accounts receivables turnover has greatly increased from 7.2 in 2015 to an estimated 7.8 in 2016 and this has consistently grown overall over the past 5 years indicate that the company’s collection of accounts receivable is efficient, and that the company has a high proportion of quality customers that pay off their debts quickly.

C. DebtManagementRatiosDebt Management Ratios attempt to measure the firm's use of Financial Leverage and ability to avoid financial distress in the long run. Debt generally represents a fixed cost of financing to a firm. Thus, if the firm can earn more on assets, which are financed with debt than the cost of servicing the debt, then these additional earnings will flow through to the stockholders. Moreover, our tax law favors debt as a source of financing since interest expense is tax deductible. Alphabet Inc.’s debt to asset ratio has declined on a rapid basis from 2012 at 18% toward an estimated finish in 2016 to 13% (14% 2015 ratio). This indicates a high level of financial flexibility due to the fact Alphabet Inc. hasn’t run significant debt margins and has actually lowered them over time. This puts them in more promising regards when it comes to their growth model of the next few years to allow for massive expansion relative to competitors. It’s even more accurate when comparing over time that this has decreased better giving the indications Alphabet Inc. can be expected to be much more financial flexible with their cash outlays and inflows as they embark on expanding their revenue stream in the next 5-10 years.

D. ProfitabilityRatiosProfitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a previous period indicates that the company is doing well. Different profit margins are used to measure a company's profitability at various cost levels, including gross margin, operating margin, pretax margin and net profit margin. The margins shrink as layers of additional costs are taken into consideration, such as cost of goods sold (COGS), operating and non-operating expenses, and taxes paid. Alphabet Inc.’s return on Assets calculates relative to costs and expenses, and it is analyzed in comparison to assets to see how effective a company is in deploying assets to generate sales and eventually profits. The more assets a company has amassed, the more sales and potentially more profits the company may generate. As economies of scale help lower costs and improve margins, return may grow at a faster rate than assets, something similar to the high volatile fluctuations that exist in the technology fields and has allowed this industry to take the forefront to monetary gains over the past 15 years. The ROA has remained consistent in for the past 5 years at 9%, which correlate to their consistency in the total asset turnover ratio. Return on equity is a ratio that concerns a company's equity holders the most, since it measures their ability of earning return on their

8

equity investments. ROE may increase dramatically without any equity addition when it can simply benefit from a higher return helped by a larger asset base. This has experienced a generally consistent but downward trend since 2012, changing about 3% from 18% to 15% for the estimated 2016 ratio. Because of Alphabet Inc.’s low use of debt to finance much of its growth, this would eat into ROE and can explain this figure. This holds true for Alphabet Inc.’s overall consistency in profitability when looking at their profit margin maintain a 22% over the last 3 years and only slightly up in 2012 and 2013 at 23%. Google has multiple streams of income. Many of Google's revenue sources have experienced tremendous growth over the years. he company's proprietary advertising service, Google AdWords, continues to be a major contributor to Google's revenue at 68%, or $45 billion in 2014. In 2015, Google's aggregate paid clicks, a key advertising measure, and rose 31% from the previous year, beating the consensus expectation of a 22% rise. Across all industries, companies continue to drive up the cost per click (CPC). In 2011, the insurance industry commanded 24% of Google AdWords revenue, for as much as $54.91 for top keywords, including "auto insurance price quotes" and "life insurance comparison quotes." Google's other projects are driving down the profitability of the company. As long as Google continues to increase its search advertising revenues, the company is able to support pursuing the other business lines, these bet subsidiaries are projects that may at some point turn around but have no hindered Alphabet Inc.’s overall growth due to it’s time proven consistent revenue generating systems it relies on which is well balanced in Alphabet Inc.’s portfolio of companies.

E. MarketValueRatiosMarket value ratios are used to evaluate the current share price of a publicly held company's stock. These ratios are employed by current and potential investors to determine whether a company's shares are over-priced or underpriced. These ratios are not closely watched by the managers of a business, since these individuals are more concerned with operational issues with potential investors however, these are significant in terms of capital gain yields and other investor metrics whether with portfolio accounts or etc. The price to equity ratio (P/E) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. The prior 2012 to 2015 rates have shown at 3% with 4% estimated for 2016. This is why the P/E is sometimes referred to as the multiple because it shows how much investors are willing to pay per dollar of earnings. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. The price to book ratio for Alphabet Inc. stands at 4.32, meaning the company is currently trading 4.32 it’s book value.

9

Sector&IndustryOutlookIn the 21st century, we have born witness to the immense power at the helm that is the Tech industry which has fully transformed not only people’s way of life but in the manner and conduct by which we go about business and further the progress for transformative technology. Technology is the backbone of the digital economy. The rate of change and the level of disruption driven by modern technology are exponential. Advancements in computer processing power, data storage, and chip design; the ubiquity of bandwidth; enterprise mobility; and many other developments that have unfolded in recent years are enabling myriad opportunities that were once impossible, both technologically and economically. Now, we have reached a tipping point where cognitive computing, big data analytics, cloud computing, and the rapidly growing Internet of Things (IoT) are transforming businesses around the globe—including those outside the technology sector. We’re also seeing promising advancements in materials, software, fabrication techniques and machine design that are likely to lead to an expansion in enterprise applications for additive manufacturing (3D printing). Meanwhile, in the technology industry itself, enterprises are making plans for the next economy rising from today’s disruptive and unprecedented change. One of the more interesting recent market trends and potentially blockbuster technological breakthroughs is the move of Virtual Reality (VR) and Augmented Reality (AR) into the mainstream. According to BIS Research (Business Intelligence and Strategy Research), a market research hand advisory company, the global AR and VR market is estimated to grow over $161 Billion and $17 billion by 2022 at a CAGR of 85.4% and 44.5% respectively through the 2015-2022, with North American leading the Market. We see early signs of similar trends emerging in the IoT, cognitive technologies, and potentially other areas. With the IoT, we anticipate that there will be a handful of large open platform providers. The smartphone is an early example of a platform that, once opened to the developer community, resulted in millions of applications. However, they will pave the way for the emergence of many other players in the IoT ecosystem (for example, companies providing solutions or applications for specific industries). Platform providers will be responsible for orchestrating the ecosystem by ensuring their platforms are interoperable. The current wave of divestiture activity in the industry underscores the struggle many companies with diverse business models are experiencing in sustaining profitable growth. These businesses—many of them multinationals—are divesting not to become smaller, but to increase focus, making them more “fit” to dominate a specific part of the technology ecosystem. Once the divestiture activity cools, we expect to see a series of acquisitions, as many of these same companies seek to scale for greater concentration in their chosen area of focus.

Global regulators, increasingly focused on the digital economy and technology companies, see opportunity to increase revenues through taxes and incentives. While regulatory uncertainty around taxation doesn’t change, the fact that global markets are part of the essential expansion channel for most technology companies in the 21st century. It does mean that many of these businesses will need to manage regulatory uncertainties when implementing their growth strategies.

10

Risk&RewardThe growth that Alphabet Inc. intends to make with the diversifying systems and ecosystem with Google and their other projects is a precursor to major transitions from other competitors and is the reason why Alphabet Inc. has exhibited immense investments in the past few years. Alphabet Inc. has robust research and development (R&D) capabilities. The R&D activities of the company focus on improving the performance of products and developing new technologies. The R&D team of the company initiated several projects to enhance and develop various products and technologies. The company leases additional R&D, and sales and support offices across the US. The company’s R&D expenses were US$6.1 billion, US$7.1 billion, and US$9.8 billion in 2012, 2013, and 2014, respectively. The R&D department employs 20,832 people. Strong focus on R&D enabled the company to develop innovative products. For instance, in February 2015, the company launched PerfKit, an open-source cloud-benchmarking tool. Google has been working on an innovative project of self-driving vehicle technology since 2009 which may provide growth opportunities to the company. In May 2014, Google announced to launch its own fleet of 100 autonomous vehicle prototypes. The self-driving car will have no steering wheels, gas, accelerator and brake pedals. The car will be equipped with extra safety features, lasers, sensors, radar and computers to map and drive software to allow the vehicles to be driven autonomously. Such innovative projects may enable the company to have huge growth opportunities.The company may benefit from its recent initiative to strengthen its mobile wallet technology. In February 2015, Google acquired Softcard Technology (Softcard), a company jointly owned by AT&T, Verizon, and T-Mobile. Softcard is an NFC-based mobile payment service and helps more Android users get the benefits of tap and pay. This acquisition enables the company to improve its existing mobile wallet technology, Google Wallet application, and helps Google to better compete with Apple Pay mobile payment service. The company has taken several strategic initiatives to strengthen its home automation offerings. In this direction, in January 2014, the company acquired Nest Labs, Inc. (Nest), one of the leading developers of thermostats and smoke alarms. The acquisition is expected to enhance Google's suite of products and services in the home automation. Also, in June 2014, the company, through Nest, acquired Dropcam, Inc., surveillance camera maker in the US. The acquisition further broadens Google’s home automation portfolio. These strategic initiatives may provide the company growth opportunities to expand its presence in home automation market. Invalid clicks pose a major threat to companies such as Google. Since the company derives a majority of its revenue from advertising, fraudulent clicks could expose it to related lawsuits. Click fraud artificially inflates the number of clicks, and increases pay per click advertising fee charged to advertisers. Increasing number of click frauds may also result in the company being compelled to refund the fee to its advertisers. The victimized advertisers may also file lawsuits against Google. Thus, avoiding invalid clicks should remain the company’s highest priority as they could have an adverse effect on the company’s brand image and profitability. Google operates in a highly competitive market, which could affect its business and operating results. Competition could intensify with the entry of new competitors, development of new technologies, products and services and convergence. The company witness’s competition from

11

general-purpose search engines including Yahoo and Microsoft’s Bing; and social networks such as Facebook and Twitter. It major competitor in mobile application market is Apple Inc. The increase in competition also forced the company to exit from some of its businesses. For instance, Google closed its social networking business, Orkut on September 30, 2014. This is primarily due to non-performance of business in other part of the world, except in India and Brazil, as a result of intense competition from its rivals such as Facebook. Some of the company’s key competitors have undertaken expansion programs to match the growth rate. For instance, in February 2015, Samsung Group acquired LoopPay, a mobile wallet provider allowing wireless payments. LoopPay app inputs and stores payment card information, and can wirelessly communicate with existing tap-to-pay terminals available at merchants and retailers. It also does not require updated hardware in most stores as it works by mimicking mag stripe technology. This acquisition enables Samsung to use LoopPay’s technology to compete with its competitors such as Google Wallet and Apple Pay.

Summary Alphabet Incorporated has shown a high level of competency and efficient competitive nature thanks to their dynamic leadership as well as innovative vision as many of the worlds leading tech companies are looking to sort their way and place into the next decade as the era of iPhones dominating the consumer market shifts from connecting people, toward connecting all forms of technology that will merge into smart driving, smart cities, and home use. The battle of cloud data space and emergence of the AR and VR market space has led Alphabet to invest in these fields while maintain a large search engine use even with uprising competitors from the likes of Amazon and Facebook on both fronts. Google has positioned itself delicately in a transitory period in their re-entry into the smart phone and hardware aspects of the Industry in the hopes attaining some form of market share here will allow their long term vision of their unique eco-system to come together. Benefitting from a number of competitive advantages and a new line release of products to push its way through, they have demonstrated considerable failures before but have the assets to absurd any losses in the hopes that one of their other projects outside of their core business model will succeed which will eventually propel them. As has been reviewed, a fundamentally sound analysis of their financial health both internally and propensity for their growth gives a company a unique ability to adapt with the changing environment. There are considerable risks as many major competitors ranging from Samsung, to Apple, Facebook, Amazon and the like puts the tech industry in the prime and major reason why it exhibits so high a volatility. Google has shown an effective consistency despite their plunders and failures in underperforming assets and will see a realization of these ventures at some point as both the current business landscape and consumer market will exhibit high demand when the change fully manifests and alphabet Inc is priming itself to be right in the center of it as a dominant leader in the industry.

12

Appendix

13

14

15

16