In this article, I will be looking at the valuation and technical outlook for Google (GOOG) in advance of Google reporting earnings on October 17th to try to gain clarity as to what the price of the stock could be after it reports.
Valuation Method #1: DCF [Discounted Cash Flow]
I will be valuing Google the same way I have been valuing stocks in my "undervalued stock of the week series." I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. The DCF table below shows the fair value of shares of Google is $862.65/share, which is slightly below its current price of $867.
EPS [ttm]: $34.12
Long-term Growth Rate: 15.83%
Earnings grow for next: 5 years
Level off: to 1% after
Benchmark return: 10 yr annualized SPY return of 6.86%+1.50% inflation= 8.36% benchmark
Valuation Method #2: Trefis
For this valuation, the method I will be using the Trefis Google page to see what the value of Google is, based on the value of each of its underlying businesses. The chart below shows that based on the underlying divisions of Google shares have an estimated fair value of $865/share, which is slightly below its current price of $867. In addition, the table shows that Cash [net of debt] accounts for $144/share of the value of Google; this leads me to an inevitable question. Will this be the quarter that Google initiates buyback or starts paying a dividend? If they do, there is an example of how this turned out for Apple (AAPL); since its first dividend payment on August 9th 2012, shares have fallen nearly 21%. Google, seeing what happened to the share price of Apple, will not start paying a dividend or buying back stock, and the only way I believe that will occur is if there is an activist investor involved.
Valuation Method #3: Historical PE
For this valuation method, I will be using the historical PE ratio, which Google has traded at on average over the last 5 years. I retrieved the PE ratio data from Morningstar s valuation page for Google, and it showed that Google has traded at an average PE of 23.9 over the last 5 years.
Using the EPS data from Valuation Method #1, I multiplied that by the historical 5-year average PE ratio to get an estimated fair value of $815.47/share, which is 5.94% below the current price of $867. [34.12 eps x 23.9 pe ratio = $815.47]
Technical Chart #1: Support
The chart below shows that Google has a strong level of support [Red Line] at $844.75. This level is very important, because it the level where shares traded in early March and failed to get through, but were able to break through in early May. After this breakout, the $844.75 has acted as a floor of support, which has been tested three times, once in June, once at the end of August, once yesterday, and has held each time. If this level of support is broken with a close below it, the next level of major support [Blue Line] is at $757.50, which is 12.63% below current levels.
Technical Chart #2: Fibonacci Retracement
The chart below shows Google with a Fibonacci retracement overlay using the low of 2013, and the high of 2013 as my beginning and endpoints used to calculate retracement levels. The chart shows that during the recent sell-off, shares were able to stay above the 38.2% retracement level, which is at $839.19. This level is very close to the support level from above, which I believe is not a coincidence, and speaks to the significance of the support Google stock has around the $840 level. If shares were to close below the 38.2% retracement level, the next stop would be the 50% retracement level, which is at $811.76 and 6.37% below current levels.
Based on the results of each valuation method, I believe shares of Google are fairly valued to slightly overvalued at current levels. Based on the results of looking at the technical charts for Google, I see that if there is a close below the $844-$839 level, shares of Google could have downside risk ranging from around 6% to 13%.
Overall, taking into account both the valuation and the technical outlook, I believe with earnings coming up a next week for Google, I see very little upside and more risk to the downside after Google reports earnings.