Published: Wednesday, August 17, 2022 · 5:32 PM | Updated: Wednesday, August 17, 2022 · 5:32 PM
📊 1,151 views
Li Lu (Trades, Portfolio) is the founder of Himalaya Capital Management, an investment firm with approximately $1.87 billion in its U.S. equity portfolio and approximately $30 billion in assets under management (most of its investments are in Asia, especially China).
Li has been called a genius by legendary investors such as
Charlie Munger (Trades, Portfolio) and
Mohnish Pabrai (Trades, Portfolio). He is even credited with giving Munger and Buffett the idea to invest into Chinese EV maker BYD Co Ltd (SZSE:002594). This turned out to be one of Berkshire’s most successful investments as it turned $232 million into ~$5.6 billion in just over a decade (assuming Berkshire has held the position unchanged since then – since it’s not a U.S. holding, we will never know about any changes to it unless Munger or Buffett makes public comments on the subject).
Li is a highly disciplined investor who runs a fairly concentrated U.S. portfolio with just six stocks. Even though the U.S. market is not his area of focus, investors can still learn from his wisdom, as this is a guru that even Munger trusts with part of his fortune.
According to Himalaya Capital’s 13F report for the second quarter of 2022, the firm was only buying shares of one U.S. public company during the three months through the end of June. It was adding to its existing position in Alphabet’s Class C non-voting shares (
GOOG, Financial) and establishing a new position in Alphabet’s Class A voting shares (GOOGL, Financial). It also sold out of Facebook parent company Meta Platforms (META, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Loading up the truck
In the second quarter of 2022, Li purchased voting shares of Alphabet (
GOOGL, Financial) for the first time at an average price of $118 per share, which is close to where the stock trades at the time of writing. The position is worth 948,000 shares and was classified as a new buy.
However, it should be noted that Li already owned non-voting shares of Alphabet (
GOOG, Financial) before this. In the second quarter, he even increased his investment in the non-vowing shares by ~77% and now has ~3 million shares, which makes up approximately 17.77% of his U.S. equity portfolio.
Why Alphabet?
Alphabet is a stock I have researched quite a lot in the past. The company is the backbone of the internet and is the market leader in search, which I’m sure everyone is already aware of. However, the company also has the world’s most popular mobile operating system with Android (sorry Apple (
In addition, Alphabet is in an advertising duopoly with Meta Platforms (
META, Financial), which Li sold out of in the second quarter. Combined, they benefit from over 50% of worldwide advertizing spend. Alphabet makes ~90% of its revenue from advertizing, which can make the stock more volatile than most tech giants. Advertizers will pull ad spend at the first sign of any economic troubles or a recession. This occurred in 2020, and Alphabet’s stock price fell off a cliff before recovering strongly.
I personally saw the 2020 crash as a prime opportunity to invest in Alphabet as I had conviction that ad spending would return. We are now seeing a similar situation, where analysts forecasted a recession and Alphabet’s share price got unfairly butchered as a result, now down by 27% from all-time highs. However, over the past month we have seen a small recovery by 12%.
Alphabet is not just about its dominant search engine, though this is indeed the backbone of what makes its advertising business so profitable. The company also has YouTube, which has approximately a 76% market share in online video and is often considered to be the “new TV.” In addition, it owns the Chrome browser, which has a 66% market share and really does allow the company to “own” the internet and cookie tracking. Then of course we cannot forget about Google Maps, which is the most popular map app by downloads, and even Gmail.
In addition, Alphabet also has many “moonshot” investments such as Waymo, the self-driving car company. Waymo’s self-driving cars, once considered the realm of sci-fi, are already operating in some parts of Arizona. Real-person volunteer tests are even occurring in San Francisco, which is huge.
Second quarter financials
Alphabet announced solid financial results for the second quarter of 2022. Revenue was $69.7 billion, which increased by 13% year over year but did miss analyst expectations by $111 million. This was mainly due to the aforementioned cyclical advertizing market, and thus I don’t deem this to be a major issue. Unfavorable foreign exchange rates also impacted growth, as revenue actually increased by 16% on a constant currency basis but was dragged down by a stronger U.S. dollar.
YouTube ad revenue growth was fairly slow at just 4% year over year. But again, this can be attributed to the cyclical ad market. In addition, the company is experimenting with YouTube Shorts as it aims to compete with TikTok. However, these short reels are harder to monetize and thus will require a teething process.
Google Cloud is a main growth driver of the company and generated rapid growth of 36% year over year at $6.3 billion. This was driven by the growing digital transformation industry. Enterprises are transitioning from legacy on premises IT networks to Cloud networks in order to be more agile and save on costs longer term. Earnings per share was $1.21 in the second quarter, which was below analyst expectations by $0.08.
Valuation
In order to value Alphabet, I have inputted the latest financials into my discounted cash flow model. I have estimated a conservative 10% revenue growth per year over the next five years. In addition, I have forecasted its operating margin to increase to ~34% over the next few years, including an adjustment for R&D expenses.
Given these factors, I get a fair value estimate of $153 per share. The stock price is just $121 at the time of writing and thus is undervalued. The fact that Li has been buying at similar levels gives me faith in my valuation estimate. The GF Value calculator also indicates the stock is modestly undervalued at the time of writing.
Final thoughts
Alphabet is a tremendous company which dominates the internet search category, which has allowed in a nearly unassailable advantage in advertizing and many technology markets. The company truly is the backbone of the internet and has potential optionality built into it from moonshot bets such as the self-driving taxi project Waymo. The stock looks undervalued due to negative sentiment from the cyclical ad market and a forecasted recession. But overall, I agree with Li that this looks to be a great long term investment.
MORE IN INSIDE INVESTMENT NEWS
Alibaba AI Spending: A 75% Profit Plunge Signals Future Alpha
Published: Thursday, August 20, 2026 · 7:40 AM
Target Earnings: Alpha Insights Amid Cautious Consumer Spending
Published: Wednesday, August 19, 2026 · 1:26 AM
