Valuation Of Google

Valuation Of Google

Meta shares continue to tumble, and i was curious to understand if 𝐭𝐡𝐢𝐬 𝐝𝐞𝐜𝐥𝐢𝐧𝐞 𝐢𝐬 𝐛𝐞𝐜𝐚𝐮𝐬𝐞 𝐭𝐡𝐞 𝐨𝐧𝐥𝐢𝐧𝐞 𝐚𝐝𝐯𝐞𝐫𝐭𝐢𝐬𝐢𝐧𝐠 𝐢𝐧𝐝𝐮𝐬𝐭𝐫𝐲 𝐡𝐚𝐬 𝐛𝐞𝐜𝐨𝐦𝐞 𝐬𝐚𝐭𝐮𝐫𝐚𝐭𝐞𝐝 or is this decline firm specific?

Thus, this weekend, i looked at Alphabet Inc.‘s earnings to check how their advertising pie of the overall business continues to perform and 𝐭𝐡𝐞𝐧 𝐯𝐚𝐥𝐮𝐞 𝐆𝐨𝐨𝐠𝐥𝐞.

1)𝗚𝗼𝗼𝗴𝗹𝗲’𝘀 𝗮𝗱𝘃𝗲𝗿𝘁𝗶𝘀𝗶𝗻𝗴 𝗿𝗲𝘃𝗲𝗻𝘂𝗲𝘀 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲𝗱 𝘁𝗼 $𝟮𝟬𝟵 𝗯𝗶𝗹𝗹𝗶𝗼𝗻 𝗶𝗻 𝟮𝟬𝟮𝟭 𝗳𝗿𝗼𝗺 $𝟭𝟰𝟲 𝗯𝗶𝗹𝗹𝗶𝗼𝗻 𝗶𝗻 𝟮𝟬𝟮𝟬 – 𝗮 𝗴𝗿𝗼𝘄𝘁𝗵 𝗼𝗳 𝟰𝟯%. However Google has mentioned in its management discussion that despite the increase in ad revenues, 𝙞𝙩𝙨 𝙩𝙧𝙖𝙛𝙛𝙞𝙘 𝙖𝙘𝙦𝙪𝙞𝙨𝙞𝙩𝙞𝙤𝙣 𝙘𝙤𝙨𝙩𝙨 𝙝𝙖𝙫𝙚 𝙞𝙣𝙘𝙧𝙚𝙖𝙨𝙚𝙙, putting pressure on its margins.

2)Most of Google’s ad revenues will continue to come outside the US in the future, 𝗲𝘀𝗽𝗲𝗰𝗶𝗮𝗹𝗹𝘆 𝗶𝗻 𝗜𝗻𝗱𝗶𝗮 𝗮𝗻𝗱 𝗲𝗺𝗲𝗿𝗴𝗶𝗻𝗴 𝗺𝗮𝗿𝗸𝗲𝘁𝘀. Thus, its revenues will exhibit volatility due to foreign currency and country risks.

3)𝗚𝗼𝗼𝗴𝗹𝗲 𝗖𝗹𝗼𝘂𝗱 𝗮𝗻𝗱 𝗚𝗼𝗼𝗴𝗹𝗲 𝗽𝗹𝗮𝘆 revenues continue to increase. This growth is encouraging as Google tries to derisk away from its advertising business. However, other bets like Google car have failed to launch, and the margin of these bets is lower than its ad business.

4)𝗚𝗼𝗼𝗴𝗹𝗲 𝗰𝗼𝗻𝘁𝗶𝗻𝘂𝗲𝘀 𝘁𝗼 𝗶𝗻𝘃𝗲𝘀𝘁 𝗶𝗻 𝗥&𝗗, 𝗮𝗰𝗾𝘂𝗶𝘀𝗶𝘁𝗶𝗼𝗻𝘀, 𝗮𝗻𝗱 𝗖𝗔𝗣𝗘𝗫 (its most recent acquisition of Fitbit (now part of Google) for $2.1 billion expand its #wearable share).

5)Google continues to be the 𝒕𝒂𝒓𝒈𝒆𝒕 𝒇𝒐𝒓 𝒓𝒆𝒈𝒖𝒍𝒂𝒕𝒐𝒓𝒚 𝒐𝒗𝒆𝒓𝒔𝒊𝒈𝒉𝒕, especially from the US and Europe. Any unfavourable passing of laws will affect its margins.

Thus, taking the above factors into account, my assumptions for Google are below:

1)For the 𝐧𝐞𝐱𝐭 𝐟𝐢𝐯𝐞 𝐲𝐞𝐚𝐫𝐬, 𝐆𝐨𝐨𝐠𝐥𝐞 𝐠𝐫𝐨𝐰𝐭𝐡 𝐰𝐢𝐥𝐥 𝐬𝐮𝐛𝐝𝐮𝐞 𝐚𝐭 𝟏𝟒%, and its 𝗘𝗕𝗜𝗧 𝗺𝗮𝗿𝗴𝗶𝗻 𝘄𝗶𝗹𝗹 𝗱𝗲𝗰𝗹𝗶𝗻𝗲 𝗮𝗻𝗱 𝘀𝘁𝗮𝗯𝗶𝗹𝗶𝘇𝗲 𝗮𝘁 𝟮𝟬%

2)Its sales to invested capital will stay at 1.39 as many of its investments in other bets have not succeeded.

When I assume the above, 𝗜 𝘃𝗮𝗹𝘂𝗲 𝗚𝗼𝗼𝗴𝗹𝗲 𝗮𝘁 $𝟭,𝟵𝟯𝟱/𝘀𝗵𝗮𝗿𝗲 𝗮𝗴𝗮𝗶𝗻𝘀𝘁 𝗶𝘁𝘀 𝗰𝘂𝗿𝗿𝗲𝗻𝘁 𝗽𝗿𝗶𝗰𝗲 𝗼𝗳 $𝟮,𝟲𝟴𝟰/𝘀𝗵𝗮𝗿𝗲, 𝗶𝗺𝗽𝗹𝘆𝗶𝗻𝗴 𝗶𝘁𝘀 𝗼𝘃𝗲𝗿𝘃𝗮𝗹𝘂𝗲𝗱. In my view, Google will need to make one of its big bets to succeed in reducing its dependency on an advertising business that is already displaying saturation.