I am typically a value oriented investor and focus heavily on valuations. Fundamentals on Google are sound: strong recurring revenue base, monopolistic tendencies, value add to customer, network effects, cross selling across revenue streams etc. I find it hard to argue that Google is going anywhere anytime soon.
Valuation wise, many think that FAANG is overpriced. Some of it is. Google trades at a whopping 37x earnings! But only 24x forward. And only 15x fwd EV/EBITDA. That is the metric I will focus on for now as I tend to use DCF models with EV/EBITDA terminal values. The average EV/EBITDA multiple over the last 10 years is about 16x. The lowest was 10x and 10x is the lowest it ever traded since IPO. Using a DCF model and using ultra bear scenario of the following assumptions: 2022-2025 revenue growth of 0% annually (yes, correct), gross margins of 55% (below the 10 year average of 60%), operating margin of about 23% (10 year average 25%), D&A constant at 8% of revenue, Capex in line with Bloomberg estimates approx 16-17% of revenue, and change in NWC of about -3% (consistent with last 4 years). WACC is 9.5% and used a 10x exit multiple. This estimates an intrinsic value of $2068, about -9% from current values. And that is the bear case with ultra bearish assumptions.
The base case then with revenue growth of 10%, same margins, higher depreciation based on consensus estimates, and an exit multiple of the 10 year average of 16x yields a price of $4831, upside of 112%.
Of course, I never truly depend on a DCF model to provide an exact price because there are so many assumptions that will never play out as expected, but it is a great tool to identify what factors impact price and some worst case scenarios. It is further evidence to me that Google is one of the most undervalued large caps with a wide moat around its largest product, expanding its range and interconnectivity of its products constantly, and generating a significant amount of cash in the meantime.
Let me know your thoughts.
Submitted May 15, 2021 at 11:30PM by SpartanDawg420 https://ift.tt/3yduqEm
