Google does fairly well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of dividends and the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the lack of dividends. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $9.67 in 2010 to an estimated $19.66 for 2014. This is a very strong level of demonstrated growth which is well above the market’s implied estimate of 8.96% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 20.67% per year, which is clearly unsustainable over a long period of time. As a result, the ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. The ModernGraham estimate is capped at 15% annual growth, which is still significantly higher than the market estimate. A significant slowdown would have to occur to justify a price as low as the market is demonstrating. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.
Be sure to check out previous ModernGraham valuations of Google Inc. for greater perspective!
Disclaimer: The author did not hold a position in Google Inc. (GOOGL) or 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 for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.