The Bretton Fund argued in a letter to investors that the COVID lockdowns forced unusual cost discipline at Google's parent Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), a fact which fueled earnings growth once advertising spending returned in 2021.
The fund, which is managed by Stephen Dodson and Raphael de Balmann, said the company's ability to drive profits during its pandemic cost retrenchment underlines why the search giant remains "a great business."
"One of our minor annoyances as shareholders [in Alphabet] has been the company’s occasional lack of focus and cost control," Dodson and de Balmann said in a fund letter released this week.
"We often had a nagging feeling that at least some of the rapid spending increases — and side projects — weren’t all that well thought out," they said.
The COVID lockdowns forced the company to restrain its costs more than usual, the fund managers noted. However, rather than curtail its long-term growth, these tighter budgets only fueled a sharp increase in earnings once advertising spending began to return as the economy reopened after COVID.
Dodson and de Balmann pointed to the firm's results from late 2020 and early 2021 as evidence for these dynamics at work. In Q4, pre-tax earnings jumped 69%, while revenue advanced 23%. In Q1, pre-tax earnings doubled on revenue growth of 32%.
"Spending will come back — as it should — but seeing how much revenue was able to increase with minimal cost increases gives us more assurance that Google is a great business," they said.
GOOGL marched steadily higher for most of the past year, setting a series of new highs in the process.
However, the upward momentum has petered out in recent weeks. Early this week, the stock hit its lowest level in four weeks, before bouncing back slightly.
On Friday, GOOGL edged up fractionally in intraday action, rising to $2,831.06 at around 1:45 PM ET. The stock would need a rally of over 3% to challenge its 52-week high of $2,925.08.
Even with the recent flattening, GOOGL has substantially outperformed the broader market over the past year. The stock has doubled over the past 12 months, compared to a nearly 40% advance in the S&P 500: