As part of a new series, each week we’re going to conduct a DCF on one of the companies in our screens. This week the stock is Alphabet Inc (GOOGL). We currently have the stock on an Acquirers Multiple of 20.90. The stock is currently priced at $131.40.
Profile
Alphabet is a holding company. Internet media giant Google is a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home, also contribute to other revenue. Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), provide faster internet access (Google Fiber), enable self-driving cars (Waymo), and more.
Inputs
- Discount Rate: 8%
- Terminal Growth Rate: 2%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) |
|---|---|
| 2023 | 72 |
| 2024 | 87 |
| 2025 | 105 |
| 2026 | 126 |
| 2027 | 152 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 2584.00 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 1758.63 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 420.67 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 2179.30 billion
Net Debt
Net Debt = Total Debt – Total Cash = -9.02 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 2188.32 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $171.23
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $171.23 | $131.40 | 23.26% |
Based on the DCF valuation, Alphabet is currently undervalued. The DCF value of $171.23 per share is higher than the current market price of $131.40. The Margin of Safety is 23.26%.
It is important to note that the valuation is based on a number of assumptions, and these assumptions could change in the future. As a result, it is important to do your own research before making an investment decision.
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3 Comments on “What Is The Real Value Of Alphabet Inc (GOOGL) Using A Simple DCF”
The obvious assumption is that FCFs increase linearly every year. They did not from 2010 to 2018, and in 2022:
https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/free-cash-flow
If GOOGL’s FCF was primarily due to advertising historically, and the nature of their business hasn’t significantly changed, mean-reversion in FCF is a more reasonable assumption.
Thanks Gary. You might be right. I’m a little more optimistic about the company’s projected free cash flow. Last 5 years FCF has been 22,832, 30,972, 42,843, 67,012, 60,010 (amounts in billions).
Seems like a 4 minute lazy analysis. To have a terminal value with a 2% growth rate for Google by 2027 is just brainless twaddle