Software Stocks

Alphabet Inc Valuation – March 2018 $GOOGL

Company Profile (obtained from Marketwatch): Alphabet, Inc. is a holding company, which engages in the business of acquisition and operation of different companies. It operates through the Google and Other Bets segments. The Google segment includes its main Internet products such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome, Google Play as well as hardware products, such as Chromecast, Chromebooks and Nexus. The Other Bets segment includes businesses such as Access or Google Fiber, Calico, Nest, Verily, GV, Google Capital, X, and other initiatives. The company was founded by Lawrence E. Page and Sergey Mikhaylovich Brin on October 2, 2015 and is headquartered in Mountain View, CA.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of GOOGL – March 2018

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 $791,672,421,491 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 5.14 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 120.94% Pass
6. Moderate PEmg Ratio PEmg < 20 41.16 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.27 Fail
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 5.14 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.04 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

EPSmg $27.69
MG Growth Estimate 8.13%
MG Value $685.42
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $401.55
MG Value based on 0% Growth $235.39
Market Implied Growth Rate 16.33%
Current Price $1,139.91
% of Intrinsic Value 166.31%

Alphabet Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $17.96 in 2014 to an estimated $27.69 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 16.33% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Alphabet Inc revealed the company was trading above its Graham Number of $437.29. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 41.16, which was below the industry average of 50.49, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $112.77.

Alphabet Inc receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $112.77
Graham Number $437.29
PEmg 41.16
Current Ratio 5.14
PB Ratio 5.27
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

Useful Links:

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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $124,308,000,000
Total Current Liabilities $24,183,000,000
Long-Term Debt $3,969,000,000
Total Assets $197,295,000,000
Intangible Assets $19,439,000,000
Total Liabilities $44,793,000,000
Shares Outstanding (Diluted Average) 705,081,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $38.72
Dec2017 $18.00
Dec2016 $27.85
Dec2015 $22.84
Dec2014 $20.57
Dec2013 $18.79
Dec2012 $16.16
Dec2011 $14.89
Dec2010 $13.17
Dec2009 $10.22
Dec2008 $6.66
Dec2007 $6.65
Dec2006 $4.98
Dec2005 $2.51
Dec2004 $0.73
Dec2003 $0.21
Dec2002 $0.21
Dec2001 $0.02
Dec2000 -$0.11

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $27.69
Dec2017 $21.99
Dec2016 $23.07
Dec2015 $20.00
Dec2014 $17.96
Dec2013 $15.99
Dec2012 $13.80
Dec2011 $11.85
Dec2010 $9.66
Dec2009 $7.34
Dec2008 $5.37
Dec2007 $4.16
Dec2006 $2.52
Dec2005 $1.10
Dec2004 $0.33
Dec2003 $0.11
Dec2002 $0.05

Recommended Reading:

Other ModernGraham posts about the company

Alphabet Inc Valuation – June 2016 $GOOGL
Google Inc. Analysis – July 2015 Update $GOOGL
18 Companies in the Spotlight This Week – 3/21/15
Google Inc. Quarterly Valuation – March 2015 $GOOGL
27 Companies in the Spotlight This Week – 12/20/14

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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.

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