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GOOGLE VALUATION

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June 23, 2007 – Comments (1)

I believe someone asked for my google valuation... so here it is. First, a brief summary of my view of the company...First, 55% of all online searches are done through google... talk about a leader in an important and growing industry... google isn't going anywhere... except into emerging markets where their growth will CONTINUE to explode. I think this stock is completely undervalued. Many people are scared away by its high PE... don't think its growth can continue... think the company can't possibly get even bigger... SKEPTICS. There will always be doubters... but I am not one that likes to bet against the best of the best... and that is exactly what Google is. They have dominated their market... are expanding into different markets... and are simply the absolute smartest because they seem to dominate wherever they go. That being said, we know its a great company and its not going away... but is this already completely factored into the price? I don't think so...

 Valuation... Future Target Price of Google for 12/09

Because Google doesn't have any long-term debt, we should be able to accurately set a target price using estimated future earnings...

 Step 1) Predict Sales in 12/09 based on past sales.

Income Statement - 10 Year Summary (in Millions)

 SalesEBITDepreciationTotal Net IncomeEPSTax Rate (%)12/0610,604.924,011.03571.943,077.449.9423.2812/056,138.562,141.68293.811,465.45.0231.5812/043,189.22650.23148.47399.121.4638.6212/031,465.93346.6550.19105.650.4169.5212/02439.51184.9218.0399.660.4546.1112/0186.4310.0710.036.990.0430.6212/0019.11-14.690.0-14.69-0.220.012/990.22-6.080.0-6.08-0.140.0

Looking at these sales figures... they nearly doubled sales from 03-04... and again in 04-05 before slowing up a bit 05-06... that "slowing up" is what seems to be scaring people... they don't think Google can keep up their growth, but why not?! Assume, for a second, that google does not comintinue to go into new markets besides the internet advertising... and dominate as they have shown they are capable of... ASSUME that... then STILL, they have so much room to grow in terms of U.S. growth (55% of all online searches go through google... but its a rising number...) and Foreign growth (did you read about their deal with China Mobile... offering google searches on the phone... stuff like this... google is preparing itself to dominate the foreign markets as well) So I am not going to bet against google. They have shown us in the past what they can do, but people continue to doubt them. They are making all the right moves, but people continue to doubt them. I, on the other hand, think they can continue their growth, which means

1) Sales in 12/09= 25 billion (which would mean a big slowdown in growth... which means this is a conservative estimate in my opinion)

2) Estimate Profit Margin...

 Avg P/EPrice/ SalesPrice/ BookNet Profit Margin (%)12/0641.4013.448.3529.012/0555.7019.7312.9123.912/04104.1016.4917.5712.512/03NANANA7.212/02NANANA22.712/01NANANA8.112/00NANANA-76.912/99NANANA-2761.8

2) Again though, I will make a conservative estimate, and say that they will have a profit margin of 33% in 12/09...

Therefore, take our 25 billion estimated sales X 33% profit margin= 8.25 billion in earnings... now lets convert that to EPS...

3) Estimate number of shares outstanding in 12/09... you can look up the historical figures yourself on this one, but they currently have 309 million shares outstanding  and by 12/09, I estimated 330 million shares outstanding. Then...

4) 8250 million (8.25 billion) in earnings/309 million shares outstanding= roughly 26.5 EPS... then,

5) estimate 12/09 PE... Their PE is around 41 right now, and lets assume that with this massive growth that the market doesn't catch on... and get excited about their future possibilities... meaning their PE stays the same this whole time (I don't think it will go down as they show they can continue to dominate)...

Then, 12/09 Target Price=EPSXPE= 26.5X41= $1086.5

I like to shoot for 25% annual gains or better, so since we did three years out, we can take the target price and divide by two.. 1086.5/2=543.25... and since the current price is LESS than that, according to this valuation, we should see UPWARDS of 25% annual returns from google over the next three years. This is a classic Rule Maker that appears to be attractively valued... let the skeptics make you money, and invest in google.

As you can see, their net profit margin has been rising every year (the farthest right column) which should come as no suprise because they have been destroying their competitors. It has been rising, and there is no reason to think it won't continue to rise at the same rate.

1 Comments – Post Your Own

#1) On December 15, 2007 at 9:11 PM, dwot (67.31) wrote:

I have to bookmark this one for 2009...

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