Last time I wrote about Google (NASDAQ:GOOG) I recommended them at or below $530 a share. We are slowly creeping up from sub-$500 levels and now is the time to buy. Let's get the basics out of the way so I can reference them for future valuation. At a $500 share price, Google has a market cap of approximately $161B. As of March 31, 2011, Google has $12.4B in cash and $36.7B in total cash and marketable securities. Total current assets, which Ben Graham preferred, are $43.3B against just $9.3B in current liabilities, which gives a $34B difference that Ben Graham would subscribe to subtracting from the share price. We can be more conservative and use all current assets not including the marketable securities (as they will later be part of my thesis). There is $19B in these current assets then against $9.3B in current liabilities. We can subtract $9.7B from the market cap to get $152.3B with just $1.8B in long-term liabilities left on a nearly pristine balance sheet. We will use a $154B market cap hence forth as this is the likely price tag for a company as you wouldn't sell securities to help pay for a company when you would surely buy the securities back as cash begins to generate.
- $24.3B in marketable securities earning
- $8.25B in property and equipment at cost and depreciated based on US accounting practices
- $7.3B in intangible assets and goodwill (majority YouTube) against an estimated brand value for Google alone at $44.3B by one brand evaluation company.
- $0 in debt (already included in price)
- Approximately $9.2B in FCF annually and growing at 13.73% compounded annual growth-rate [CAGR] since 2008.
Can they still grow?
The easy answer is yes, though many pundits have been yelling no on television lately, Google is doing phenomenally well. The Google search engine alone generated $5.9B in revenue in Q1-2011 which is a 20% growth YoY. In recent years they have added additional revenue sources such as YouTube android and Google Docs. This is in addition to the free products that are widely known such as Google Earth, Chrome, Gmail and Picasa among many other programs that are fully integrated into our lives. Their pipeline of new products rivals Apple (NASDAQ:AAPL) in Google+ (Facebook competitor), cars that drive themselves, advertising statistics packages for companies, Google Healthcare android mobile, Google TV and a plethora of incredibly diverse and technology intensive patents. Google's free products are generally created to protect the cash cow which is the Google search engine and I for one, agree completely with this business model.
Google has a consistent business with 27% growth that normally does not sell without a premium. Especially considering that both Google's owned sites are growing at a 32% rate while Ad-Sense, the highly coveted ad serving application, grew at just 19%. These numbers come from the recent 1Q report. An important statistic to consider is the "Cost-Per-Click" [CPC] growth of 8% year-over-year. A company pays Google for each click they receive on their advertising in this model and Google has passed along an 8% increase in fees over the past year which rivals Coca-Cola (NYSE:KO) given the advertising environment at present.
I mentioned earlier that $24.3B in marketable securities would be important. They are currently generating $760M (based on Q1-2011) in interest income annually for a yield of 3.12%. This is nearly exactly the current 10-year Treasury yield. This $24.3B in securities then becomes an additional hedge on inflation, as interest rates increase to an arbitrary number (we'll double the treasuries) then Google will be earning an additional $760M in income without any increase in expenditures. Free cash flow can easily reach $10B in this environment and we've already seen Google pass on an 8% increase in costs to customers when interest rates and inflation (for their costs) are between 0-3%.
Given $9.2B in FCF, 13.7% growth rate and a conservative 8% discount rate (twice the 30 year Treasury):
A NPV analysis (not including shareholder equity; a common mistake in valuation) gives a valuation of $213.8B for $663.42 per share valuation. This is a 25% discount to the current $500 share price and a potential 33% increase all the while my calculations have remained extremely conservative.
Disclosure: I am long GOOG.