Running the Numbers: Google Looks Like a Buy

Valuecruncher has previously completed a  valuation of Google (GOOG) using a scenario approach. We started with a base case before looking at growth, disruption, and black swan scenarios. GOOG was trading at $542.30 when we completed that valuation. Our base case was $481.94 with our low-end disruption scenario at $363.22. With GOOG trading at $430.14 we thought it was time to update our base case valuation.

Valuecruncher valuation model of GOOG with interactive assumptions

Valuecruncher produces a valuation of $493.88 for GOOG. This is a current valuation, not a target price. This valuation is 15% above the current share price of $430.14 (note our model picks up an earlier price of $449.15 because we completed the valuation earlier). This isn’t materially different to our earlier base case valuation of $481.94.

Assumptions

Our assumptions are revenues of US$22.25 billion in 2008 growing to US$33.75 billion in 2010. We have used a flat EBITDA margin of 40% to 2010. We used a terminal growth rate of 6.0%. We used a terminal capital expenditure number of US$4.0 billion. We have used a WACC (discount rate) of 10.0%. All of these assumptions can be amended in the Valuecruncher on-line model to adjust the valuation.

Our analysis incorporates the cash on the GOOG balance sheet – Valuecruncher calculates a net debt number.

Based on our analysis the current share price looks cheap. It appears a great opportunity to be buying GOOG. Play with our assumptions – what does your analysis say?

 Click to enlarge

Disclosure: None

Comments

[nyc_917:]

My analysis says:

- Never buy a stock trading near a multi-year low unless it is in a clear upswing. GOOG is trading around a 2-year low.

- Lower highs and lower lows say GOOG is in a down-trend. I will not buy until I am sure that trend has changed direction.

- Remember what happened during the last downturn - 2001-2003 when internet companies who depended upon advertising as their primary revenue stream tanked?

- Last time I looked, the broader market was still in a down-trend. I would not look to pick up bargains until this fact changes. What is "cheap" now may get *MUCH* cheaper in the coming weeks and months!

nyc

2008 Sep 23 08:40 AM

[NetNet:]

I disagree with this analogy. You are using models based on broad paint strokes. Google may experience a down swing. However, Google is no longer about advertising. The Internet is their OS. Not just an Internet. The diversification Google has is innovative. Peter Lynch once stated, don't invest in the numbers only....invest in what you know.

2008 Sep 23 09:32 AM

[NW Tech:]

Not sure what planet our Peter Lynch disciple resides, but 99% of Google revenues and 100% of Google profits are derived from advertising.

Perhaps, over time the revenue and profit stream from other divisions of Google can increase their contribution.

But for today Google is nothing but the worlds largest advertising agency.

2008 Sep 23 10:55 AM

[jack dee:]

yes GOOG is a one trick pony.

But it is a very fine trick. And unlike the dot boom era, Goog is making real cash really fast and seems to be doing very well.
The moat is not as huge as many make out, but we are getting into dept of justices backyard. And may very well find that goog is forced to "open" its methods ranking and goog may face price caps in some parts of the world. price control is not unheard of where single of groups of noncompeteing companies control a market.
example power, transport, health.

(long goog msft and a host of others)

2008 Sep 23 01:11 PM

[rjbullock:]

My problem with Google is that they're doing nothing to sell Google Apps... I think it's nuts. As an IT guy, I believe Google Apps is a major threat to MS Exchange and Sharepoint, but does Google have a "partner program" that would allow me to train on and sell their offerings? Hell no! Sure, I can make some coin offering Google expertise to small businesses, but I can make a lot more right now selling MS solutions. Google needs to get on the the ball here! Also, they should embrace more MS developer tools and technologies... That would really screw MS.

2008 Sep 23 01:39 PM