Alphabet Inc. is the huge conglomerate, - well known part is the Google - which offers cloud based solution related digital advertising platform with several applications and subscription services for individuals and companies. Alphabet's main segments are Google Services, Google Cloud, Google Bets.
Google Services include all products and services that were launched on the market under Google brand such as Android, Chrome, Google Maps, Google Play and Youtube. Google Cloud provides digital platforms and cloud-based services for companies, while Google Bets is responsible for research on future technologies including healthcare field.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Revenue | 136819 | 161857 | 182527 | 257637 | 282836 |
| ROE | 17,3% | 17,0% | 18,1% | 30,2% | 23,4% |
| EBITDA (m USD) | 36559 | 46012 | 54921 | 91155 | 90770 |
| EBITDA margin% | 26,7% | 28,4% | 30,1% | 35,4% | 32,1% |
| Dividend (USD) | 0 | 0 | 0 | 0 | 0 |
| Dividend yield % | 0,0 | 0,0 | 0,0 | 0,0 | 0,0 |
From 2018 the company has generated a significant revenue improvement, its former USD 137 billion (2018) has doubled by 2022. Meanwhile its return on equity has also increased from 17,3% to 23%. The company's EBITDA is worth nearly three times more now than five years ago while the EBITDA margin has also increased. This is a robust company with a constantly rising revenue.
All of its revenue is returned back to the business: the company does not pay out any dividend but buys back its own shares in large numbers.
As the company's D/E rate is stable but it doesn't pay out dividends, we are going to use DCF analysis.
| D/E | 0,311 | 0,370 | 0,436 | 0,428 | 0,426 |
| Div/FCFE | 0 | 0 | 0 | 0 | 0 |
Our calculation is based on the yield of an US 10-year government bond (3,83%) as risk free return and the average equity risk premium (4,4%) in the US market during the last 80 years. The cost of debt comes from the company’s AAA bond rating. Using these data we get 7,94% of WACC. We expect that the company’s EBIT will grow by 6,36% in the next 5 years and will creep back to 2% after the 5th year. The return of invested capital is 27,72%.
As the earning before interest and taxes has been increasing significantly, ie. EBIT has been growing by 6,36% from year to year, so do FCFF values.
Discounting the FCFF figures and discounting with the weighted average cost os capital (WACC) we recieve that the value of the company is 971.212,4 USD. This means 142,4 USD/share, calculated with 6820m shares and without loans. Using our margin of safety methodology we get 93,98 USD target price.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023E | 2024E | 2025E | 2026E | 2027E | TV | DCFV | V | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EBIT (1-t) | 23142 | 28781 | 34661 | 66182 | 62926 | 54570 | 58040 | 61730 | 65656 | 69831 | |||
| FCFF | 17834,79 | 22180,73 | 26712 | 51004,48 | 48495,53 | 42055,2 | 44729,55 | 47574 | 50599,3 | 53817 | 66090,78 | ||
| DCF | 38962,1 | 38352,54 | 38392 | 37830,2 | 37276,7 | 36731,25 | 948772 | 971212,4 | |||||
| Pe= | 142,4065 |
As in March of this year the stock price dropped below 90 USD, I was curious to check whether there was any fundamental reason. As I did not find any particular, I added it to a watching list.
At the time of this publication the share price is 120,02USD that is 30 USD higher than our target price but it falls short of the intrinsic value by 20 USD (142,4 USD vs 120,02USD).
Our calculation was confirmed by reality: 90 USD is a strong buy as this price is considered conservative. However, at 140 USD shares should be sold as this is the highest price which can be justified by the company's financial situation.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| ROIC | 24,25% | 23,28% | 22,18% | 36,18% | 28,65% |
| D/E | 0,311 | 0,370 | 0,436 | 0,428 | 0,426 |
| P/BV | 4,42 | 5,01 | 5,72 | 8,32 | 4,84 |
| Dividend | 0,0 | 0,0 | 0,0 | 0,0 | 0,0 |
| Dividend payout rate (DIV/FCFE) | 0 | 0 | 0 | 0 | 0 |
| FCFE/shares outst | 1,46 | 1,70 | 3,18 | 4,12 | 3,22 |
| Cash to stockholders to FCFE | 0,03 | 0,27 | 0,44 | 0,49 | 0,81 |
The company’s return on invested capital (24%-28%) is much higher than the weighted average of cost of capital (WACC=7,94%) so the company is real value creator. It yields 17%-20% more than the cost of capital, which is extraordinary. The D/E ratio is stable and low. The leverage is 0,4, it is a cash machine it does not need external capital to run business successfully. The price to book value is stable, around 5 in the last couple years.
It doesn’t pay out any dividend however it could. Yearly 3-4 USD could be paid out as a dividend safely, which means a 2,5%-3% dividend yield. So the investor value is not the dividend but the share repurchase activity: more and more percentage of the FCFE is paid back to stockholders with the stock repurchase policy.
According to current share prices and other data:
| Stock | Price | Shouts | NI | P/E | BV | P/BV | Revenue | P/Sales | Ebitda | EV/Ebitda |
|---|---|---|---|---|---|---|---|---|---|---|
| Meta | 294,26 | 2590 | 23200 | 32,85058 | 125713 | 6,062487 | 116609 | 6,535803 | 42241 | 18,0425 |
| Amazon | 130 | 10250 | -2722 | -489,53 | 146043 | 9,124025 | 513983 | 2,592498 | 39039 | 34,13253 |
| Microsoft | 343,77 | 7440 | 72738 | 35,16248 | 166542 | 15,35738 | 198270 | 12,89983 | 97843 | 26,14034 |
| Apple | 191,94 | 15790 | 99803 | 30,36715 | 50672 | 59,81079 | 394328 | 7,685816 | 130541 | 23,21671 |
| Alibaba | 92,17 | 2580 | 9774 | 24,32971 | 169189 | 1,40552 | 134567 | 1,767139 | 22532 | 10,55382 |
| 120,02 | 14046 | 59972 | 28,1098 | 256144 | 6,581458 | 282836 | 5,960348 | 90770 | 18,57223 | |
| Átlag | 30,67748 | 7,987353 | 6,296217 | 22,41718 | ||||||
| Pe= | 130,9832 | 145,658 | 126,7832 | 144,8674 |
Based on the relative analysis the fair price of the stock is between 130-145,6 USD, the FCFE analysis gave us 142,4 USD, so this level is proven. We get these price levels based on P/E, P/BV, P/S és EV/EBITDA, a 130 USD price is considered a good price.
*Important to note that from the P/BV calculation we excluded the Apple data in order to avoid their distorting effects on a 5 components competitor average. Therefore our calculation in this case is resctricted to 4 elements.
According to our analysis, the Alphabet (GOOGL) has a significantly increasing revenue, its ROIC is outstanding, between 23%-30%. It has an outstanding EBITDA margin (30-35%). Although is does not pay dividend, the stock repurchase program offers a value to its stockholders on yearly basis..
GOOGL capital leverage is conservative, it has an outstanding cash generation. It does not require more external capital for the further growing.
Its ratios and financial results are stable, the company is a reliable profit generator. At the price of 122 USD the company is undervalued by 10% compared to its competitors.
According to FCFE analysis we got 142,4 USD for fair price. Using our margin of safety our target price is 93,98 USD. This evaluation is proven by the relative analysis, as well. At this price (93,98 USD) the company would be undervalued by cca 30% compared to the competitors, therefore we suggest to buy a bigger stake at this price. At the current price (120,02USD) the share price is not too attractive at the moment, we recommend purchusing below 100 USD.
