Google (GOOG) worth US$1,000+ a share today – you must be dreaming
A US fund manager Manning & Napier has come out with an amazing call in Barron’s that their current view of the Google (GOOG) share price equates to US$950-1,050. Henry Blodget works through some of the assumptions and is not convinced.
Neither are we.
We took the assumptions from Henry Blodget’s analysis in Silicon Alley Insider and ran these through the Valuecruncher on-line valuation tool to see what sort of numbers are required to justify a US$1,000 a share valuation for GOOG.
Assumptions – for a US$1,000 a share valuation for Google today
We started with a 2008 revenue number of US$22.5 billion – and then grew that at 30% per annum to 2010. We used a 40% EBITDA margin on these revenues. We used a US$4.25 billion terminal capital expenditure figure. For a discount rate (WACC) we used 10%.
These are aggressive projections for the period to the end of 2010. But where things get really wild is in determining the terminal growth rate. This is the rate that reflects the growth potential beyond 2010. To achieve a valuation over US$1,000 a share we have needed an 8% terminal growth rate. This is a big number. How big. To get to an 8% terminal growth rate requires a 30% growth rate from 2010 to 2011 then dropping to 6% in perpetuity from 2015. The growth numbers look like 24% in 2012, 18% in 2013, 12% in 2014 and 6% in 2015 and beyond. 6% is a big perpetuity number – 8% is huge. Play with the assumptions and see the impact. Note: in our model the terminal growth rate must be more than 2% below the discount rate. In this example we come up against this constraint.
Valuecruncher valuation model of US$1,000 Google share price with interactive assumptions
Our analysis incorporates the cash on the Google balance sheet – Valuecruncher calculates a net debt number.
Here at Valuecruncher we do not believe that Google is worth over US$1,000 a share. The assumptions required are just too heroic to be realistic. A month ago we completed a scenario valuation for Google. We still stand by that as a way to look at and think about the valuation of Google.
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Tags: GOOG