My own Google Valuation
Just to get a rough idea of what it might be worth to pay for Google, I made a little DCF valuation to see where it comes out at. I am actually very similar to Bambi’s valuation (what a cool name! :)) which I posted about earlier when I plug in the same number, which makes me rather happy as I it tells me that I am not doing anything terribly wrong. Picking the right numbers from a balance sheet and income statement can be a little bit tricky. So let’s see…
We first need to take a look at the next few years of cash flows. I am excluding the current year there, stupid me, but now it’s too late. This actually makes us even more valuable, so ok.
The first thing I will have to say that tables are really bad to do in HTML and I am glad for easy suggestions. I know I could do wonderful CSS stuff arround all of this and I know the PRE tag, something else please. Easy.
Anyway. I looked at the next 10 years. Growth in sales will be 80%, 70%, 70%, 40%, 35%, 30%, 20%, 20%, 15%, 15% and then we will grow by 10% into perpetuity. This in itself is very very ambitious. It will also bring us to a sales level of $38 billion by 2015. Not bad really. In 2010 we are arround $20 billion. The problem is that this doesn’t tell us much because we have no real clue where this advertising market will move, if Google is even keeping with that market which I doubt anyway.
NOP/Sales will be at 35% for the next 5 years and then at 30%. This again, is fairly ambitious, especially in the advertising market and where they will have to rely more and more on their contextual advertising network and outside partners where they will have to pay out large percentages of their revenue. So I actually doubt that. But ok, let’s be optimistic.
NOA/Sales is at 30%, making NOA grow to $11 billion by 2015. Operating Cash to sales is at 25%, again fairly high of a number. But this gives us operating cash of almost $10 billion by 2015. Sales /NPPE is at 6 and Depreciation to NPP&E at 25%, for the lack of a better number. Taxes are at 30%, but again, there are mostly provisions available in their income statements which are at 50%, so I guessed the 30%.
At 10% growth after 10 years, the residual value is at $86 Billion.
We then take NOP, add back depreciation to get the EBITDA. Take out taxes, and expenditure on PP&E as well as the increase in NOA and the increase in operating cash. This brings us to the free cash flow which comes in at some interesting numbers, but anyway.
On we go to the WACC, which is hard to talk about. There is no debt as far as I know. Now what kind of return do we want from this? 15%? Sounds like a good number, let’s take that.
COMPANY VALUE
Present Value of Free Cash Flow 5.155,24
Present Value of Residual Value 33.255,80
Subtotal: 38.411,04
plus: Investments 0,00
Enterprise value 38.411,04
less:Total Debt 0,00
less: Minority interests 0,00
less: Other Equity 0,00
Shareholder value 38411,04
Number of shares (Millions) 400,00
Value per share 96,03
The share number is a guess there. But as with all those assumptions, things get tricky. Let’s presume that we have a higher discount rate of 20%. I mean we actually have no clue what we are doing here and as they said, there is actually no voting right so we can’t even do anything against not knowing ;)
COMPANY VALUE
Present Value of Free Cash Flow 3.613,08
Present Value of Residual Value 10.864,34
Subtotal: 14.477,42
plus: Investments 0,00
Enterprise value 14.477,42
less:Total Debt 0,00
less: Minority interests 0,00
less: Other Equity 0,00
Shareholder value 14477,42
Number of shares (Millions) 400,00
Value per share 36,19
This is just to show how volatile this can be.
Now change the growth rate after 10 years from 10 to 5%.
COMPANY VALUE
Present Value of Free Cash Flow 3.613,08
Present Value of Residual Value 6.913,67
Subtotal: 10.526,75
plus: Investments 0,00
Enterprise value 10.526,75
less:Total Debt 0,00
less: Minority interests 0,00
less: Other Equity 0,00
Shareholder value 10526,75
Number of shares (Millions) 400,00
Value per share 26,32
Now let’s change the growth rates in the next 10 years. I now went with a more moderate 50, 45, 40, 40, 35, 30, 25, 20, 15, 10%.
COMPANY VALUE
Present Value of Free Cash Flow 2.928,98
Present Value of Residual Value 5.388,23
Subtotal: 8.317,22
plus: Investments 0,00
Enterprise value 8.317,22
less:Total Debt 0,00
less: Minority interests 0,00
less: Other Equity 0,00
Shareholder value 8317,22
Number of shares (Millions) 400,00
Value per share 20,79
So there we go. A little more modest. A little more secure. With a hefty discount rate and little growth after 10 years, then if they have 400 million shares in total at time of issue, then $20 might be a good price. At least then, there is some good security that you make a killing, because you actually have no clue. A venture capitalist has more clue and they’d probably use a 40% discount rate.
In general this just goes to show how much will need to happen for a valuation of just $20 billion to be supportable. I will have to sit back and take a look how many shares they will issue and at what price. We’ll see.