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Is Google Overvalued at $377?

February 25, 2006 | About:

by Dah Hui Lau (David)

There is no doubt that Google is an interesting company. Google has superior technical staffs, Internet advertising is growing dramatically at the expense of television and newspaper advertising and Google has dominant market share in the search business.

So, what is so great about this company?

Net income:

It is growing its earning at a very, very high rate. Net income increased by over 200% from $399M (2004) to $1297M (TTM). Very impressive indeed.

Gross Margin (TTM): 57.2%

Net Margin (TTM): 24.7%

ROA (TTM): 21%

ROE (TTM): 23%

Without doubt, Google is a strong and admirable company. Bill Miller, one of the legendary investment managers, believed that Google is undervalued and Google should be valued above $200B, which are 2X current value. ( Jan 20, 2006 ; money.CNN).

But, is it a good buy?

There are a couple of ways to value Google.

Google Valuation, Method 1:

Comparison between other Online / Internet companies:

Price/Sale Ratio

Google = 21X

Yahoo = 9.7X

IACI = 1.3X

P/E (TTM)

Google = 75X

Yahoo = 26X

IACI = 11.7X

Even by relative comparison, Google seems excessively priced; it has 2X higher valuation than Yahoo and more than 19X higher than IAC/InterActive Corp, based on price/sale ratio.

Google's Valuation, Method 2:

Fundamental analysis on Income statement, Balance Sheet, Cash Flow Statement, etc.

Google:

Market Cap = $111B ( Feb 24, 2006 )

Enterprise Value (TTM)

= Market Cap + Total debt (interest paying) - Cash

= $111B + $0.55B - $7.6B

= $104B

Free Cash Flow (TTM)

= Net operating Cash Flow - Net Investing Cash Flow (excluding acquisitions)

= $2.17B - $0.65B

= $1.5B

Enterprise Value / Free Cash Flow

= $104B / $1.5B

= 69X

Earning yield (TTM)

= Operating Income / Enterprise Value

= $1.75B / $104B

= 1.7%

By simple fundamental analysis, Google seems to be excessively valued.

Google's Valuation, Method 3:

Relative comparison to other similar sized companies.

One of the companies that I want to compare Google to is Berkshire Hathaway.

Market Cap:

Google = $111B

Berkshire = $133B

Price/Sale Ratio

Google = 21X

Berkshire = 1.8X

P/E (TTM)

Google = 75X

Berkshire = 20X

Price/Book (TTM)

Google = 12X

Berkshire = 1.5X

Sales / Revenue (TTM)

Google = $5.3B

Berkshire = $76B

Net income (TTM)

Google = $1.3B

Berkshire = $6.7B

Berkshire has sales / revenue of 14X bigger than Google;

Berkshire has net income of 5X bigger than Google;

Yet, Berkshire only has 20% higher market value than Google.

In conclusion:

By three methods of simple comparisons / analysis, Google seems to be overvalued. Therefore, it is not surprising that Google's value plunged from $475 ( Jan 11, 2006 ) to $377 ( Feb 24, 2006 ) in a matter of 7 weeks, wiping Google value by $29B! Yep, that's right, $29B loss in 7 weeks!!

Warren Buffett and Charlie Munger, two of the great investors of our time, sum it up the best......

Charlie Munger said "Buying great businesses at advantageous prices is very tough."( May 8, 2001 )

Warren Buffet said "The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. Also, "It is more important to say "no"to an opportunity, than to say "yes".

All the best,

Dah Hui Lau (David)

dahhuilaudavid@gmail.com

http://dahhuilaudavid.blogspot.com/2006/02/is-google-overvalued-at-377-feb-25.html


Rating: 3.0/5 (7 votes)

Comments

kfh227
Kfh227 premium member - 8 years ago
I would not buy google. But some info was accidentalyl released on the investor relations web site

They intend to go into off-site backup in the near future. This is BIG business and they claim to have infinite storage for off-site backup. Anyone familiar with this area of data management knows that if google were to get even 5% of the market, it would result in a windfall in pofits.

I personally don't invest in new companies, so I have no interest in GOOG.
thechinastory
Thechinastory - 6 years ago
So after two years, it prove to be a very good buy. What do we learn? Share price always overshoot. But in this case, it is slightly different, you need to compare Google with other companies like Apple which has a similar earning growth.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago


Dah Hui Lah,

The market has already proved you wrong. It's up about 180 points.
mattray253
Mattray253 - 6 years ago
Chhhssssshhhhhhhh!

(that's the sound of stockdoc's glass house shattering from the stone he just threw)
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Silence.

(That's the sound of Mattrey actually saying anything here that can be measured or used productively)

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