The Internet has been growing to become essential of our daily lives, and so has Google (GOOG, Financial). The majority of the world knows about Google and uses Google to search for just about anything, anywhere, and at anytime people want information. It has grown from a venture Internet business that nobody was sure about, to a giant so-called monopoly in everybody’s mind in the search business. As any value investors seeking a great sustainable business with wide moat, we often get the sparkle in our eyes when we see "monopoly.” Charlie Munger once endorsed Google, saying, “Google has a huge new moat. In fact I’ve probably never seen such a wide moat. I don't know how to take it away from them. Their moat is filled with sharks.”
In September 2004, Google stock was trading at $100 per share, and until now, going through the Global Financial Crisis, it was trading at nearly $670 per share, giving the investors an easy annualized return of more than 31% per year. So with the current price, is Google undervalued or overvalued after the advance trend over seven years?
First, we might do simple discounted free cash flow with a conservative assumption. Over time, Google has been a terrific cash cow, generating rapidly increasing operating cash flow and free cash flow over years. Since 2005, the FCF has advanced from $1.6 billion to more than $7 billion, making annualized growth of more than 34%.
If we assume over the next five years, that the FCF of Google will grow at the rate of 25% per year (the number seems to be high for other companies, but I do not think it is the case for Google), then after that it would grow 5% per year to infinity, the discount rate of 10%. Then the discounted FCF value of Google will fall to around $300 billion.
Currently, Google is trading at around $220 billion, 27% off the conservative estimated value. In addition, Google has a very strong and liquid financial structure, as it has D/A of only 20%, whereas the total cash and cash equivalent is up to more than 60% of the total assets. Adjusting the cash level of $42.5 billion, debt of $4.2 billion, we would come to around $160 billion, 47% off the estimated calculated value.
For the relative multiple valuation, in the past, Google has been trading at very high multiples. The average over five years shows the P/E is 30x, 5.3 times the book value and 19.4x operating cash flow. But right now, it was trading at the even a little bit cheaper than the 2008-2009 bottom level; P/E is at 22.6x, 4x the book value and more than 15x cash flow. So with the high growth in the business performance, Google can be considered to be trading at the equivalent level to when the stock was around $300 of the beginning of 2009.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
In September 2004, Google stock was trading at $100 per share, and until now, going through the Global Financial Crisis, it was trading at nearly $670 per share, giving the investors an easy annualized return of more than 31% per year. So with the current price, is Google undervalued or overvalued after the advance trend over seven years?
First, we might do simple discounted free cash flow with a conservative assumption. Over time, Google has been a terrific cash cow, generating rapidly increasing operating cash flow and free cash flow over years. Since 2005, the FCF has advanced from $1.6 billion to more than $7 billion, making annualized growth of more than 34%.
| USD million | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
| OCF | 2,459 | 3,581 | 5,775 | 7,853 | 9,316 | 11,081 |
| CAPEX | -838 | -1,903 | -2,403 | -2,358 | -810 | -4,018 |
| FCF | 1,621 | 1,678 | 3,373 | 5,494 | 8,506 | 7,063 |
If we assume over the next five years, that the FCF of Google will grow at the rate of 25% per year (the number seems to be high for other companies, but I do not think it is the case for Google), then after that it would grow 5% per year to infinity, the discount rate of 10%. Then the discounted FCF value of Google will fall to around $300 billion.
Currently, Google is trading at around $220 billion, 27% off the conservative estimated value. In addition, Google has a very strong and liquid financial structure, as it has D/A of only 20%, whereas the total cash and cash equivalent is up to more than 60% of the total assets. Adjusting the cash level of $42.5 billion, debt of $4.2 billion, we would come to around $160 billion, 47% off the estimated calculated value.
For the relative multiple valuation, in the past, Google has been trading at very high multiples. The average over five years shows the P/E is 30x, 5.3 times the book value and 19.4x operating cash flow. But right now, it was trading at the even a little bit cheaper than the 2008-2009 bottom level; P/E is at 22.6x, 4x the book value and more than 15x cash flow. So with the high growth in the business performance, Google can be considered to be trading at the equivalent level to when the stock was around $300 of the beginning of 2009.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
