Alphabet Inc. (GOOGL) Valuation Report

Intrinsic Value
$1.2T

Value Per Share
$95 -40%

Price Target
$107 -32%

Market Cap
$2T

Enterprise Value
$1.9T

Price
$157.73 -1.07%

Adjusted Yield
2.0%

TTM Growth Margin Ratio Yield
Revenue $307B 8.7% 6.1x
Gross $174B 11.1% 56.6% 10.8x
EBITDA $100B 6.7% 32.5% 18.9x
EBIT $84B 12.6% 27.4% 22.4x 4.5%
Profit $74B 23.0% 24.0% 26.7x 3.7%
FCFF $25B 30.5% 8.2% 74.7x 1.3%
FCFE $48B 31.5% 17.2% 41.1x 2.4%
Cost of Equity = 9.0% | Cost of Capital = 8.9%Currency: USD | Updated:
Sector: Communication Services | Industry: Internet Content & Information | Read more...

Alphabet Inc.
provides various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America.
It operates through Google Services, Google Cloud, and Other Bets segments.
The Google Services segment offers products and services, including ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube.
It is also involved in the sale of apps and in-app purchases and digital content in the Google Play store; and Fitbit wearable devices, Google Nest home products, Pixel phones, and other devices, as well as in the provision of YouTube non-advertising services.
The Google Cloud segment offers infrastructure, platform, and other services; Google Workspace that include cloud-based collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar, and Meet; and other services for enterprise customers.
The Other Bets segment sells health technology and internet services.
The company was founded in 1998 and is headquartered in Mountain View, California..

Full-time employees: 182,502 | HQ: Mountain View
Website: https://www.abc.xyz

Valuation

➜ Revenue Growth

➜ EBIT Margins In Year 10

➜ Reinvestment Efficiency

➜ Cost of Capital

GOOGL Valuation Output

Terminal value

$1.4T

PV Terminal Value

$600B

+ PV FCFF

$516B

= Sum of PV

$1.1T

+ Cash

$111B

- Debt

$29B

= Intrinsic Value

$1.2T

Value Per Share

$95

Overvalued by 40% vs its $158 Price

1-Year Price Target

$107 (-32%)

10-Year Fundamental Projections for Alphabet Inc. (GOOGL)
YearGrowthSalesEBIT %EBITTaxNOPATReinvestmentROICFCFFWACCPV FCFF
TTM 8.7% $307B 27.4% $84B 14% $72B $25B 36% $25B 8.9% --
2025 7.5% $330B 27.4% $91B 14% $78B $15B 36% $63B 8.9% $58B
2026 6.9% $353B 27.5% $97B 14% $84B $15B 36% $68B 8.9% $58B
2027 6.9% $378B 27.5% $104B 14% $89B $16B 36% $73B 8.9% $57B
2028 6.9% $404B 27.6% $111B 14% $96B $17B 36% $78B 8.9% $56B
2029 6.9% $432B 27.6% $119B 14% $103B $19B 36% $84B 8.9% $55B
2030 6.4% $459B 27.7% $127B 16% $107B $23B 35% $84B 8.9% $50B
2031 6.0% $487B 27.7% $135B 18% $111B $23B 34% $88B 8.9% $49B
2032 5.5% $514B 27.8% $143B 20% $115B $22B 33% $93B 8.8% $47B
2033 5.1% $540B 27.8% $150B 21% $118B $22B 32% $97B 8.8% $45B
2034 4.6% $564B 27.9% $157B 23% $121B $21B 31% $100B 8.8% $43B
♾️ 4.6% $590B 27.9% $165B 25% $124B $65B 8.8% $59B 8.8% --
How is GOOGL's expected return calculated?

The expected return is a percent (%) estimate of how much a stock's value will change per year. It is used to calculate GOOGL's 1-year price target by multiplying the stock's present value with (1 + expected return). The expected return is calculated using a stock's risk (cost of capital), excess returns, and dividend yield.

Expected Return = (1 + Cost of Capital) * (Cost of Capital * (1 + ROIC - Cost of Capital - Dividend Yield))
12.4% = 108.9% * (8.9% * 127.1%)

We exclude dividend payments because they aren't reflected in a stock's price. Note that excess returns are highly dependant on our estimate of invested capital and its return. Neglecting to capitalize expense items such as operating leases, R&D, brand name marketing expenses, may inflate the excess return estimate.

Growth

In the 12 months ending Q4'23 Alphabet Inc. (GOOGL) grew revenues by 8.7%, from $283B to $307B - indicating a deceleration of revenue growth. GOOGL has a 5-year and 3-year revenue compound annual growth rate (CAGR) of 13.7% and 6.1% respectively.

Revenue Growth Estimates

Sustainable
4.2%
Fundamental
9.6%
Priced-in
8.6%

Bottom Line Growth Estimates

Fundamental Earnings Growth
0.1%
Fundamental EBIT Growth
8.4%
Priced-in FCFF Growth
7.5%

Looking at forward estimates, we can see that the market is pricing-in a 8.6% long-term revenue growth rate, while the financials indicate a future revenue growth rate between 4.2% and 9.6%.

Using the average of these 3 estimates we get a 7.5% long-term revenue growth for GOOGL.

What is GOOGL's sustainable revenue growth?

Similar to fixed vs variable costs, the sustainable growth rate shows how much we can expect the company to grow based on their reinvestment into the business, excluding variable demand and pricing. This rate may be helpful as a long-term baseline for the company.

(GOOGL) has invested $201B in total capital, consisting of $283B in book value of equity, plus $29B in total debt, less $111B in cash & equivalents.
By adding on the average reinvestment of $17B in the last 4 quarters on a TTM basis to the $201B capital base, and applying the current sales to capital ratio of 153.0%, we can expect the company to grow its revenue to $333B, implying growth of 8.4%. However, we assume at least one gap year for CapEx to transform into growth, so we divide the rate by 2 and get a 4.2% sustainable revenue growth.
Use your own judgement based on the type of business since it takes time for reinvestment to yield growth.

What are GOOGL's fundamental revenue & EBIT growth rates?

The fundamental growth rates analyze how much (GOOGL) is reinvesting into the business, adjusted for the quality of those reinvestments to come up with an estimate for a long-term future growth. Both fundamental and sustainable gorwt rate estimates attempt to use fundamentals in estimating growth.

Alphabet Inc. (GOOGL) has reinvested an average of $17B on a rolling TTM basis, reflecting a reinvestment rate of 23.4%, calculated as:
Reinvestment / (EBIT - Tax) a.k.a. NOPAT.
By multiplying the reinvestment rate with the return on invested capital (ROIC) we get a long-term estimate for a growth in EBIT:
23.4% * 36.0% = 8.4% (Reinvestment rate * ROIC)

In order to convert this to a fundamental revenue growth rate, we analyze the relationship between EBIT growth and Revenue growth, and come up with a scaling factor of 114.2%. We then multiply the fundamental EBIT growth estimate by the revenue scaling factor and get an equivalent for a fundamental revenue growth rate of 9.6%.

What FCFF & revenue growth rates is the market pricing-in for GOOGL?

In order to justify the current $2T market capitalization given a 8.9% cost of capital, GOOGL needs to keep growing its un-levered free cash flows by 7.5% across many ( >10 ) years.

GOOGL's market implied FCFF growth rate of 7.5% =
1 + (Enterprise Value * Cost of Capital - FCFF) / (Enterprise Value + FCFF) =
1 + ($1.9T * 8.9% - $25B) / ($1.9T + $25B)

By analyzing the relationship between EBIT growth and revenue growth, we get a scaling factor of 114.2% that we apply to our implied FCFF growth in order to get the market implied revenue growth rate of 8.6%

Margins

Gross
56.6%
2.2% YoY
EBIT
27.4%
3.6% YoY
Profit
24.0%
13.2% YoY
FCFF
8.2%
20.1% YoY

In the last three years, Alphabet Inc. (GOOGL) had an average EBIT margin of 27.9%, and managed to convert 36.9% of it into unlevered free cash flows. Conversely, it had a three-year average profit margin of 25.0%, converting 86.1% into levered free cash flows.

GOOGL's core business seems to be improving, given that their gross margin has increased by 1.1%, from the 3-year average of 56.0%.

Why is GOOGL scaling revenues by 3.0% relative to COGS?

GOOGL grew revenue by 8.7% in the last 12 months, and their COGS changed by 5.6% in the same period. This means that the company is scaling revenues 3.0% better than costs.

A company that has a scaling rate above 1:1 indicates efficient growth that may translate into added value in the bottom line. Conversely, if the rate is lower, e.g. 1:0.9, it shows that while the company managed to grow, their costs increased more than revenues.

Free Cash Flows

Reinvestment
-$25B
FCFF
$25B
FCFE
$48B
Net CapEx
-$21B
Simple FCFF
$69B
Change in WC
-$3.8B

Note: cash flows in the table and chart are presented as inflows and outflows, meaning that positive numbers indicate how much a company has taken in, and negatives show how much cash has flown out.

What is included in GOOGL's $33B capital expenditures?

In the last 12 months GOOGL invested $32B in plant property & equipment (PPE) CapEx. By adding the $495M in acquisition expenses, we get a total CapEx of $33B.

How much is GOOGL reinvesting into the business?

In the last 12 months ending Q4'23, GOOGL made capital expenditures of $33B. By netting out the depreciation of $12B, we get a NetCapEx of $21B, indicating that the company invested in future growth.

Finally, we add on the change in Working Capital of $3.8B, and get a Total Reinvestment of $25B.

By investing more than it depreciates, GOOGL is increasing its future growth assets.

How are GOOGL's $25B free cash flows to the firm (FCFF) calculated? GOOGL's $25,266,000,000.00 Free Cash Flows to the Firm (FCFF) =
$84,293,000,000.00 EBIT
- $11,821,000,000.00 Tax
- $32,251,000,000.00 Plant Property Equipment
- $495,000,000.00 Acquisitions
+ $11,946,000,000.00 Depreciation
+ -$3,845,000,000.00 Change in Working Capital
- $22,460,000,000.00 Stock Based Compensation

Free Cash Flows to the Firm are important because they indicate how much a company has left over for all (debt & equity) investors.
It is a measure of the true bottom line for investors, as opposed to earnings and the simplified version of free cash flows (Cash from operating activities - PPE).

In the last 12 months GOOGL had $25B in free cash flows, indicating that the business has managed to create value for investors.

How are GOOGL's $48B free cash flows to equity investors (FCFE) calculated? GOOGL's $47,975,000,000.00 Free Cash Flows to the Equity (FCFE) =
$73,795,000,000.00 Net Income
- $32,251,000,000.00 Plant Property Equipment
- $495,000,000.00 Acquisitions
+ $11,946,000,000.00 Depreciation
+ -$3,845,000,000.00 Change in Working Capital
+ $28,504,000,000.00 Total Debt today
- $29,679,000,000.00 Total Debt one year ago

Free Cash Flows to the Equity investors show how much the company has left over for shareholders.
It is an insightful metric when paired with FCFF for analyzing companies that have a lot of debt, as it can reveal the effect of interest rates on the value of equity.

When compared to FCFF, they should be roughly in-line, else we need to think about what causes the difference. In the last 12 months GOOGL had $48B in free cash flows to equity, indicating that the business can return capital in the form of dividends and buybacks.

Returns

ROE
26.0%
ROIC
36.0%
Sales to Cap
153.0%
How much excess returns (value) is GOOGL creating on average (22%), and how to calculate it?

ROE Excess Returns 17.0% = Return on Equity - Cost of Equity
ROC Excess Returns 27.1% = Return on Capital - Cost of Capital

Average Excess Returns = (ROE - Cost of Equity + ROIC - Cost of Capital) / 2

For every 1% of growth in its net and operating income, the value of GOOGL's stock changes by an average of 0.22%.

Excess returns are important because they help us estimate a company's target price.

If you are analyzing a company with a lot of R&D expenses, consider capitalizing them as an asset to get a better ROE & ROC estimate - You can use our automated spreadsheet.

Capital Structure

Equity
$283B
Debt
$29B
Cash
$111B
Interest Coverage
273.7x
Debt to EBITDA
0.28x
Debt to Capital
1.4%

Dividends & Buybacks

Adj. Yield
2.0%
Dividends + Buybacks - SBC
FCFE Payout
81.4%
% FCFE paid as Div + Net Buybacks
R-R Upside
-55.3%
FCFE yld. / Cost of Equity - 1

Alphabet Inc. has transferred a total value of $39B to investors in the last 12 months. The required cash return (excluding expected growth) for GOOGL is $87B, or a 4.4% yield in the same period.

With an adjusted payout of 81.4%, GOOGL seems to be spending an affordable portion of its FCFE.

SEC Filings

Examine and validate data:

Historical SEC Filings