As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, Alphabet Inc (GOOG).
Profile
Alphabet is a holding company. Internet media giant Google is a wholly owned subsidiary. Google services account for nearly 90% of Alphabet’s revenue, of which more than 85% is from online ads. Other Google services revenue is from sales of apps and content on Google Play and YouTube, as well as sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home. Goolgle’s cloud computing offerings account for a bit more than 10% of total Alphabet 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.
Recent Performance
Over the past twelve months the share price is up 57.48%.
Inputs
- Discount Rate: 9%
- Terminal Growth Rate: 2%
- WACC: 9%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2025 | 74.81 | 68.63 |
| 2026 | 80.95 | 68.13 |
| 2027 | 87.6 | 67.64 |
| 2028 | 94.79 | 67.15 |
| 2029 | 102.58 | 66.67 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 1494.74 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 971.48 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 338.23 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 1309.71 billion
Net Debt
Net Debt = Total Debt – Total Cash = -12.18 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 1321.89 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $106.09
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $106.09 | $144.35 | -36.06% |
Based on the DCF valuation, the stock is overvalued. The DCF value of $106.09 per share is lower than the current market price of $144.35. The Margin of Safety is -36.06%.
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