Software Stocks

Alphabet Inc. Valuation – October 2015 Update $GOOG $GOOGL

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – October 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Alphabet Inc. (GOOG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Alphabet Inc (Alphabet) is a collection of Companies. The Company’s collection include Calico, Google’s health and longevity effort; Nest its connected home business; Fiber, its gigabit internet arm; and its investment divisions such as Google Ventures and Google Capital, and incubator projects, such as Google X. These will be managed separately in Alphabet. On October 2, 2015, Google implemented a holding company reorganization pursuant to the Agreement and Plan of Merger (the Merger Agreement), dated as of October 2, 2015, among Google, Alphabet and Maple Technologies Inc., a Delaware corporation (Merger Sub), which resulted in Alphabet owning all of the outstanding capital stock of Google. Pursuant to the Alphabet Merger, Merger Sub, a direct, wholly owned subsidiary of Alphabet and an indirect, wholly owned subsidiary of Google, merged with and into Google, with Google surviving as a direct, wholly owned subsidiary of Alphabet.

[level-free]

To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

[/level-free]
[level-mg-stocks-screens-subscriber]

Downloadable PDF version of this valuation:

ModernGraham Valuation of GOOG – October 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $490,817,335,058 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 4.77 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 214.60% Pass
6. Moderate PEmg Ratio PEmg < 20 38.73 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.20 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 4.77 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.03 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

GOOG value Chart October 2015

EPSmg $18.38
MG Growth Estimate 8.27%
MG Value $460.16
Opinion Overvalued
MG Value based on 3% Growth $266.54
MG Value based on 0% Growth $156.24
Market Implied Growth Rate 15.11%
Current Price $711.89
% of Intrinsic Value 154.71%

Alphabet Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned by the lack of dividends, and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the lack of dividends.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $11.85 in 2011 to an estimated $18.38 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 15.11% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Alphabet Inc. (GOOG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

GOOG Charts October 2015

Net Current Asset Value (NCAV) $87.62
Graham Number $257.95
PEmg 38.73
Current Ratio 4.77
PB Ratio 4.20
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

 

[/level-mg-stocks-screens-subscriber]

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $88,103,000,000
Total Current Liabilities $18,457,000,000
Long-Term Debt $1,994,000,000
Total Assets $144,281,000,000
Intangible Assets $19,698,000,000
Total Liabilities $28,040,000,000
Shares Outstanding (Diluted Average) 685,490,000

Earnings Per Share History

Next Fiscal Year Estimate $17.44
Dec14 $21.02
Dec13 $19.07
Dec12 $16.17
Dec11 $14.89
Dec10 $13.17
Dec09 $10.22
Dec08 $6.66
Dec07 $6.65
Dec06 $4.98
Dec05 $2.51
Dec04 $0.73
Dec03 $0.21
Dec02 $0.21
Dec01 $0.02
Dec00 -$0.11

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $18.38
Dec14 $18.19
Dec13 $16.08
Dec12 $13.80
Dec11 $11.85
Dec10 $9.66
Dec09 $7.34
Dec08 $5.37
Dec07 $4.16
Dec06 $2.52
Dec05 $1.10
Dec04 $0.33
Dec03 $0.11
Dec02 $0.05
Dec01 -$0.02
Dec00 -$0.04

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Software Industry – August 2015
The 16 Best Stocks For Value Investors This Week – 8/1/15
Google Inc. Analysis – July 2015 Update $GOOGL
Google Inc. Quarterly Stock Valuation – September 2014 $GOOGL
17 Companies in the Spotlight This Week – June 21, 2014

Other ModernGraham posts about related companies

Intuit Inc. Analysis – October 2015 Update $INTU
Oracle Corporation Analysis – October 2015 Update $ORCL
CA Inc. Analysis – August 2015 Update $CA
The Best Companies of the Software Industry – August 2015
Ansys Inc. Analysis – Initial Coverage $ANSS
Yahoo! Inc. Analysis – August 2015 Update $YHOO
Autodesk Inc. Analysis – August 2015 Update $ADSK
Microsoft Corporation Analysis – August 2015 Update $MSFT
Cisco Systems Inc. Analysis – August 2015 Update $CSCO
Google Inc. Analysis – July 2015 Update $GOOGL

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back To Top