Google Inc. Quarterly Valuation – June 2014 $GOOG

Logo_Google_2013_Official.svgBenjamin 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 5 Undervalued Companies for the Defensive Investor.  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 specific look at how Google Inc. (GOOG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Google Inc. (Google), is a global technology company. The Company’s business is primarily focused around key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. The Company generates revenue primarily by delivering online advertising. The Company also generates revenues from Motorola by selling hardware products. Effective February 21, 2014, Google Inc acquired Spider.io, a provider of online fraud detection services. Effective March 12, 2014, Google Inc acquired Green Throttle Games. In April 2014, Google Inc acquired Titan Aerospace. Effective May 5, 2014, the Company acquired Rangespan. Effective May 6, 2014, the Company acquired Adometry Inc. Effective May 7, 2014, the Company acquired Appetas Inc. and Stackdriver Inc. Effective May 16, 2014, Google Inc acquired Quest Visual Inc. Effective May 20, 2014, Google Inc acquired Enterproid Inc, doing business as Divide.

GOOG Chart

GOOG data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - FAIL
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $551.76
MG Value $666.15
MG Opinion Fairly Valued
Value Based on 3% Growth $259.60
Value Based on 0% Growth $152.18
Market Implied Growth Rate 11.16%
Net Current Asset Value (NCAV) $74.87
PEmg 30.82
Current Ratio 4.63
PB Ratio 4.06

Balance Sheet – 3/31/2014

Current Assets $75,314,000,000
Current Liabilities $16,270,000,000
Total Debt $3,234,000,000
Total Assets $116,526,000,000
Intangible Assets $19,494,000,000
Total Liabilities $24,815,000,000
Outstanding Shares 674,460,000

Earnings Per Share

2014 (estimate) $20.65
2013 $18.04
2012 $16.73
2011 $14.89
2010 $13.17
2009 $8.28
2008 $6.66
2007 $6.65
2006 $4.98
2005 $2.51

Earnings Per Share – ModernGraham

2014 (estimate) $17.90
2013 $15.76
2012 $13.73
2011 $11.46
2010 $9.15
2009 $6.70

Conclusion:

Google Inc. qualifies for Enterprising Investors but not for Defensive Investors.  The Defensive Investor is concerned with the lack of dividend payments and the high PEmg and PB ratios, while the Enterprising Investor is concerned about the lack of dividends.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Microsoft Corp (MSFT) and ModernGraham’s valuation of Apple (AAPL).  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $9.15 in 2010 to an estimated $17.90.  This level of demonstrated growth supports the market’s implied estimate of 11.16% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s methods, to return an estimate of intrinsic value that is within a margin of safety relative to the market price at this time.

Be sure to review the previous ModernGraham Valuations of Google Inc. (GOOG)!

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 Google 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.

Disclaimer:  The author held a long position in Apple Inc. (AAPL) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia; this article is not affiliated with the company in any manner.


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Comments

2 responses to “Google Inc. Quarterly Valuation – June 2014 $GOOG”

  1. Martin Costa Avatar
    Martin Costa

    I don´t understand On Valuation Summary you say “Market implied Growth rate 11.16%” and under conclusions you say “This level of demonstrated growth supports the market’s implied estimate of 1.57% earnings growth”

    1. Benjamin Clark Avatar

      Martin, The 1.57% reference was a typo. The correct market implied estimate is 11.16%. Thanks for pointing that out.

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