Running The Numbers – Google ($GOOG) trading well below our estimated intrinsic value
$GOOG announced stronger than expected third quarter financial results today. This resulted in a US$13.85 (4.08%) lift in the share price to close at US$353.02 – and more in after-hours trading. This is still less than half the 52-week high of US$747.24. This is a good result for $GOOG in volatile market conditions. We decided to have a look at $GOOG with the Valuecruncher interactive tool to place an estimate on the intrinsic value of the company using a discounted cash flow valuation.
Valuecruncher valuation model of $GOOG with interactive assumptions
Valuecruncher produces a valuation of US$416.73 for $GOOG. This is a current valuation (an estimate of intrinsic value) not a target price. This valuation is 18.0% above the current share price of US$353.02.
Assumptions
In 2007 $GOOG had annual revenues of US$16.6 billion and an EBITDA margin (profits) of 40.7%. Reuters aggregates 26 analysts covering $GOOG and these have mean estimates of 2009 and 2010 revenues of US$22.4 and US$27.9 billion respectively. For our analysis we have used US$22.0 billion in 2008, US$27.0 billion in 2009 and US$32.5 billion in 2010. We have forecast EBITDA margins remaining flat at 40% to 2010. We have estimated capital expenditure in 2008 at US$3.075 billion rising to US$3.75 billion in 2010 and at US$3.25 billion beyond that. Capital expenditure dropped dramatically in quarter three to US$452 million from US$697 million the previous quarter. We don’t believe that capital expenditure will remain at the current level (Q3). All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.
Other Model Assumptions:
Discount Rate: 11.0%. We believe the discount rate is in the 9-11% range. We have used the upper end of this range to reflect the uncertain market conditions that $GOOG signalled in the announcement.
Terminal Growth Rate: 6.0%. The US economy grew at an average of 3.6% over the last five-years. $GOOG showed that while growth is slowing there is still more to come.
Our analysis incorporates the cash the $GOOG balance sheet – Valuecruncher calculates a net debt number.
Based on our analysis and assumptions the current share price is at a discount to intrinsic value. Play with our assumptions – what does your analysis say?
Disclosure: None
Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.
Tags: GOOG