In this article I will provide you with a very conservative DCF analysis of Google (NASDAQ:GOOG) and a short commentary on the company, explaining why it is undervalued and why it will keep improving in the future.
On the x-axis you have the discount rate, while on the y-axis the terminal growth rate.
(data source: Google Finance)
This model gives us an average fair value of $701 that I consider a bit too high but still I can see a 15% upside ($682) compared to the current price of $595.08. The downside is limited in the cases in which Google grows slower than 3% forever (which I consider very unlikely for a company like GOOG) and its cost of capital is higher than 7%.
As you can see, I projected a stable 15% growth in the revenues, again I think I was being quite conservative because from 2009, the average growth rate has been 26% . This reinforces the thesis that the stock, I would say, is dramatically undervalued for what it is right now and given its future potential.
Google has many advantages that set it apart from any other big company in the hi-tech industry. First of all, it is a secular growth stock. They don't need the U.S. or world economy to keep growing to maintain a huge growth rate. As a matter of fact, during the 2007-2010 recession, the average growth rate was of 21%. Moreover Google has a lot of cash (in particular free cash flow) to sustain its growth and possibly make some strategic acquisitions. More importantly, they have not started to monetize (as much as they could) Android and YouTube, but I am confident that they will find a way. Finally, today Google is the most visionary company among the big hi-tech companies: Glass is estimated to generate $11bn in revenues by 2018 and looking even further ahead, driverless cars have the potential to become a product that would disrupt the entire car industry.
Google is a must buy, with at least a 15% upside and a bright future ahead. Furthermore it is not as expensive as it seems at 31.88x earnings, because if you look at Facebook (NASDAQ:FB) it is trading at 88.74 times earnings. A much more troublesome company like Yahoo! (NASDAQ:YHOO) has a 27.8 P/E. The industry's average is 36.57.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.