Running The Numbers – Henry Blodget’s Negative View On Google ($GOOG)
Valuecruncher has recently completed a valuation of $GOOG and previous also completed a multiple scenario valuation for the company. Our recent valuation came out at US$493.88. Henry Blodget in Silicon Alley Insider came out this week with an argument for a fair value of $GOOG being US$300-375 per share. This was based on a multiple (20-25x) of free cash flow and backed by a report that $GOOG is aiming internally for 15% revenue growth next year (2009). We thought that we would revisit our valuation and have a look at Henry’s assumptions in a DCF valuation.
First of all we want to applaud anyone with an audience that talks about valuation with some numbers attached. As we have said previously – in our experience most people don’t run any numbers at all.
Our perspective here is looking at the intrinsic value of $GOOG. Our approach is to start with a DCF and then potentially look at multiples. For that reason we would put aside the 20-25x free cash flow as a starting point and begin with more fundamental analysis. We started with the report of $GOOG internally targeting 15% revenue growth next year (2009). We fleshed that out with some of our own assumptions. Assuming revenues of US$22.5 billion in 2008 we assumed 15% revenue growth in 2009 and 12.5% 2010. We used an EBITDA margin of 37.5% in 2008 rising to 40% in 2010. We used a discount rate of 10% and a terminal growth rate of 5.0%. For CAPEX we assumed US$3.0 billion in 2008 and US$3.5 billion beyond that. We accept that we are adding quite a bit to Henry’s starting point.
Valuation of $GOOG using 15% 2009 revenue growth starting point
This valuation comes out at US$352.67. This is in the middle of the US$300-375 range Henry talks about as fair value using the 20-25x free cash flow metric. Based on these assumptions Henry’s numbers are reasonable. But are these assumptions reasonable?
The revenue target is the easiest starting point. $GOOG did US$16.6 billion in revenues in 2007 – assuming analyst estimates are correct and $GOOG makes the US$22.5 billion 2008 revenue consensus. A 15% increase in 2009 takes revenue to US$25.9 billion in 2009 and a 12.5% increase in 2010 is revenues of US$29.1 billion. This compares to consensus estimates for 2009 of US$28.4 billion. The analyst projections may be off – but that far off? We don’t believe a drop off in on-line advertising spend will impact $GOOG anywhere near as deeply as that - but that is the big question.
Our view is that 15% revenue growth in 2009 looks way too low for $GOOG. Current consensus estimates are 26% revenue growth. The 20-25x free cash flow metric also seems arbitrary. We struggled to find a comparable to make that relevant. We are sticking to the DCF approach. We are also sticking with our earlier valuation numbers for $GOOG. We don’t agree with Henry - we think $GOOG looks cheap. But everyone is entitled to their own assumptions.
Valuecruncher valuation model of GOOG with interactive assumptions
All of this analysis incorporates the cash on the GOOG balance sheet – Valuecruncher calculates a net debt number. All of the assumptions can be amended in the Valuecruncher on-line models to adjust the valuations.
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.
Disclosure: None
Tags: GOOG