Google is taking very basic search patterns (at this stage) and showing trends over time. This is an early first draft – but shows the huge potential of Google leveraging the massive information assets they possess. The value starts to come when you layer additional information over the top of this base data. For example – looking at search traffic for air travel then layering the share price movements of two airlines (Southwest [$LUV] and Delta [$DAL]) over the top. Search traffic for air travel is down – but the two share prices examined have taken much bigger hits. Is this an example of an over-reaction?
This type of data will get more sophisticated over time. It is also but another data point for analysis. However, I think that this release from Google Finance is a fascinating step in the on-line finance space. There are elements of the failed Monitor110 business with this. But there is also a reason that people were excited about what Monitor110 could have been. Google Domestic Trends isn’t yet perfect – but it could be a game-changer.
Today is five years since Google ($GOOG) had their initial public offering (IPO). That seems amazing to those of us that follow the markets. In some ways the $GOOG IPO process
feels like another time, long ago. In other ways five years is but a heartbeat. The New York Times has a great piece looking back at the IPO and the skepticism around it. As I said – somehow it feels a long time ago.
After the IPO $GOOG was had a market capitalization of US$27 billion and five years later that has risen to US$140 billion – it has been higher. Over five years $GOOG’s market capitalization has grown at a compound annual growth rate of just under 39%. That is pretty impressive. The graph below shows the closing prices for $GOOG over the last five years.
At Valuecruncher we have an interactive analyst report for $GOOG. Based on our discounted cash flow analysis – we believe $GOOG is currently fairly valued.
ce is that we have added an interactive comparator (or multiple) based valuation tool to the site. This new interactive comparator tool allows you to complete valuation analysis of a company against a peer group across a range of changeable metrics.
We will soon be adding the capability to change the peer group of companies. Currently the peer group is set by an algorithm and can not be changed.
Discounted cash flow (DCF) valuations are not available for all the companies in the dataset. This is because of data limitations and the relevance of the three-year DCF format for certain industries. Where they are available they are on a tab on the company page.
We are excited to bring you this new interactive comparator valuation tool. We are still working through the kinks – so there are still some rough edges. We are working through those. But we hope this tool makes more valuation analysis accessible to a wider group of people.
Valuecruncher produces a valuation of US$369.98 for $GOOG. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 12.1% above the current share price of US$330.16.
Assumptions
Revenue: Reuters aggregates 25 analysts covering $GOOG and the mean estimates of 2009 and 2010 revenues are US$23.3 billion and US$26.6 billion respectively. For our analysis we have used US$23.3 billion in 2009, US$26.5 billion in 2010 and US$31.0 billion in 2011.
Profitability: We have used an EBITDA margin of 40.0% to 2011. Reuters has $GOOG‘s EBITD margin at 32.25% last year and an average of 34.8% over the last five-years. Reuters use EBITD not EBITDA that we at Valuecruncher use and this explains the difference between our numbers and Reuters. The missing “A” is amortization – the accounting treatment of the acquisition cost of intangible assets (depreciation is the same for tangible assets). For a technology company like $GOOG this is material – for $GOOG amortization was US$270 million in 2008.
Capital Expenditure: We have assumed capital expenditures of US$2.75 billion in 2009 then US$3.0 billion per annum moving forward.
Terminal Growth Rate: 5.0%. In our assumptions we have 2010/11 revenue growth at 17.0% – we have assumed that growth eventually slows to a 4.0% long-term stable growth rate.
Our analysis incorporates the cash on the $GOOG balance sheet – Valuecruncher calculates a net debt number.
Play with our assumptions – what does your analysis say? Our model is interactive – you can change any of our assumptions.
Valuecruncher produces a valuation of US$25.34 for $MSFT. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 33.6% above the current share price of US$18.96.
Assumptions
Revenue: Reuters aggregates 30 analysts covering $MSFT and the mean estimate of 2009 revenues is US$67.3 billion. For our analysis we have used US$64.0 billion in 2009, US$68.5 billion in 2010 and US$72.5 billion in 2011. Between 2004 and 2008 $MSFT grew revenues at a compound annual growth rate of 13.2% – revenues of US$36.8 billion in 2004 to US$60.4 billion in 2008.
Profitability: We have used an EBITDA margin of 40.0% to 2011. Reuters has $MSFT‘s EBITD margin at 39.25% last year and an average of 37.0% over the last five-years.
Capital Expenditure: We have assumed capital expenditures of US$3.75 billion per annum moving forward.
Terminal Growth Rate: 3.0%. In our assumptions we have 2010/11 revenue growth at 5.8% – we have assumed that growth eventually slows to a 3.0% long-term stable growth rate. We have used 3.0% as our terminal growth rate.
Our analysis incorporates the cash on the $MSFT balance sheet – Valuecruncher calculates a net debt number.
Comparator Analysis
Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $MSFT we looked at four peer companies – IBM ($IBM), Apple ($AAPL), HP ($HPQ) and Google ($GOOG). We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $MSFT and the peer set.
We have used the last financial year (LFY) as the base set of metrics. $MSFT is currently priced at the bottom of the peer group for the EV/EBITDA and EV/EBIT metrics and in the middle for the EV/FCF metric. The market is currently valuing the profits (EBIT and EBITDA) and free cash flow produced by $MSFT at less than half that of the comparable numbers for $GOOG. This reflects the perceived different future growth prospects of the two businesses. The comparator numbers show $MSFT is comparably priced against the peer group – even with the strengths of their business model (39.8% EBITDA margins vs 18.9% for $IBM and 11.7% for $HPQ). $MSFT’s growth is slowing – but it is still a very good business. Should $MSFT’s profits (at the EBITDA and EBIT levels) really be valued less than $IBM and $HPQ?
Play with our assumptions – what does your analysis say? We think that $MSFT looks undervalued. Our model is interactive – you can change any of our assumptions.
Last week a Global Equities Research analyst Trip Chowdhry put out a research note laying out his argument for Google ($GOOG) posting negative revenue growth in the current 2008 year. Ch
owdhry’s analysis (and we have not seen the original full research note) has $GOOG posting revenues of US$15.71 billion in 2008 (5% below actual 2007 revenues of US$16.94 billion), US$15.23 billion in 2009 (3% below his 2008 projection) and US$14.57 billion in 2010 (4% below his 2009 projection). This analysis was picked up by a range of commentators that we really respect. These included analyst’s like Barron’s Eric Savitz, Silicon Alley Insider and Ashkan Karbasfrooshan.The only problem is that the analysis is deeply flawed.
At Valuecruncher we believe that top-down analysis can lead to flawed conclusions. Current trends can be mistakenly extrapolated out. We believe that you need to work from the bottom up. This appears to be a case of top-down analysis gone wrong.
Why?
Chowdhry’s 2008 revenue number appears based on currently deteriorating marcro conditions – remember 2008 revenues of US$15.71 billion. However, through three quarters of 2008 $GOOG has reported US$16.09 billion of revenues (through three quarters). $GOOG already has reported 2008 revenues above Chowdhry’s projection (through three quarters). Unless $GOOG announces negative Q4 revenues it is not going to be posting revenues for the 2008 financial year of US$15.71 billion.
So what do we think about $GOOG’s future revenues and the implications for valuation?
Valuecruncher produces a valuation of US$350.60 for $GOOG. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 11.0% above the current share price of US$315.76.
Assumptions
Revenue: Reuters aggregates 26 analysts covering $GOOG and the mean estimates of 2008 and 2009 revenues are US$22.4 billion and US$27.9 billion respectively. For our analysis we have used US$21.5 billion in 2008, US$24.75 billion in 2009 and US$29.0 billion in 2010. Citi analyst Mark Mahaney has some assumptions around revenues that we are broadly in agreement with. Assuming Q4 revenues are in line with Q3 then 2008 revenues come in at US$21.635 billion.
Profitability: We have used an EBITDA margin of 40.0% to 2010. Reuters has $GOOG‘s EBITD margin at 36.4% last year and an average of 36.0% over the last five-years.
Capital Expenditure: We have assumed capital expenditures of US$2.75 billion in 2008 then US$3.0 billion per annum moving forward.
Terminal Growth Rate: 5.5%. In our assumptions we have 2009/10 revenue growth at 17.2% – we have assumed that growth eventually slows to a 4.0% long-term stable growth rate.
Our analysis incorporates the cash on the $GOOG balance sheet – Valuecruncher calculates a net debt number.
Comparator Analysis
Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $GOOG we looked at a two peer companies – Microsoft ($MSFT) and Yahoo ($YHOO). We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $GOOG and the peer set.
We have used the last financial year (LFY) as the base set of metrics. Of the peer group $YHOO is the closest direct competitor. But $YHOO has had a number of recent struggles and their LFY performance against $GOOG is not pretty. $MSFT’s numbers are an interesting comparison. $MSFT shows how far $GOOG still has to go from a financial perspective. $MSFT has over 3.6x the revenues of $GOOG (on a LFY basis). $MSFT’s financial performance is comparable to $GOOG. The market is currently valuing the revenues, profits (EBIT and EBITDA) and free cash flow produced by $MSFT at less than half that of the comparable numbers for $GOOG. This reflects the perceived different future growth prospects of the two businesses. That is an interesting observation – but to properly understand the implications you need to do the bottom-up analysis for each (probably using a discounted cash flow model).
Play with our assumptions – what does your analysis say? Our model is interactive – you can change any of our assumptions.
At Valuecruncher we have looked at Apple ($AAPL) twice over the last six-months. In June with the $AAPL share price at US$186.10 we produced a valuation of US$146.70.
Then in September with the $AAPL share price at US$131.05 we had a valuation of US$163.98. We are now in early-December and $AAPL has continued to head south – with the market generally. $AAPL is now trading at US$94.00 – just over half the price we first looked at in June. We felt it was time to revisit the valuation of $AAPL from an intrinsic value perspective – and most importantly the assumptions that we are using. We have also completed some high-level comparator analysis looking at the current price of $AAPL against some broad peers using a range of metrics.
Valuecruncher produces a valuation of US$109.55 for $AAPL. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.5% above the current share price of US$94.00.
Assumptions
Revenue: Reuters aggregates 29 analysts covering $AAPL and the mean estimate of 2009 revenues is US$40.6 billion. For our analysis we have used US$36.5 billion in 2009, US$43.5 billion in 2010 and US$49.0 billion in 2011.
Profitability: We have used an EBITDA margin of 19.0% to 2011. Reuters has $AAPL‘s EBITD margin at 20.8% last year and an average of 16.8% over the last five-years.
Capital Expenditure: We have assumed capital expenditures of US$1.15 billion per annum moving forward.
Discount Rate: 11.0%.In our June valuation we used a discount rate of 11.0% but dropped that to 10.0% in September. We believe 11.0% is a reasonable assumption in the current market conditions.
Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 12.6% – we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.
Our analysis incorporates the cash on the $AAPL balance sheet – Valuecruncher calculates a net debt number.
Comparator Analysis
Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. At Valuecruncher we have previously looked at comparator analysis. For $AAPL we looked at a range of broad peers. We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $AAPL and the peer set.
We have used the last financial year (LFY) as the base set of metrics. Of the peer group $EBAY and $YHOO had rough LFY performance. The other numbers are interesting. The one that stands out a mile to us however is that $AAPL is currently trading at 7.0x last years free cash flow (FCF). Remove the cash and you can have the business for 7.0x last years FCF – no growth assumed. Wow – that looks cheap.
Using our valuation of US$109.55 that gives a EV/FCF multiple of 8.7x. That is still pretty resonable compared to the peer set.
$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 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.
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.
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.
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.
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.
Valuecruncher has previously completed a valuation of GOOG using a scenario approach.We started with a base case before looking at growth, disruption, and black swan scenarios.GOOG was trading at US$542.30 when we completed that valuation.Our base case was US$481.94 with our low-end disruption scenario at US$363.22.With GOOG trading at US$430.14 we thought it was time to update our base case valuation.
Valuecruncher produces a valuation of US$493.88 for GOOG.This is a current valuation not a target price.This valuation is 15% above the current share price of US$430.14 (note our model picks up an earlier price of US$449.15 because we completed the valuation earlier).This isn’t materially different to our earlier base case valuation of US$481.94.
Assumptions
Our assumptions are revenues of US$22.25 billion in 2008 growing to US$33.75 billion in 2010. We have used a flat EBITDA margin of 40% to 2010. We used a terminal growth rate of 6.0%. We used a terminal capital expenditure number of US$4.0 billion. We have used a WACC (discount rate) of 10.0%.All of these assumptions can be amended in the Valuecruncher on-line model to adjust the valuation.
Our analysis incorporates the cash on the GOOG balance sheet – Valuecruncher calculates a net debt number.
Based on our analysis the current share price looks cheap.It appears a great opportunity to be buying GOOG.Play with our assumptions – what does your analysis say?
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.
