Monday, May 26, 2014

Buying Google Inc. (GOOG, GOOGL) for the next 5 years?

As 2014 marks the 10th anniversary of Google Inc's IPO, let's take a look at what the company has delivered so far and see what the stock might have for investors in the next 5 years.

For those unfamiliar with the company, more information can be found on their investors relations webpage.

Google Inc . Logo

Here is a brief description provided by Reuters:
Google Inc. (Google), incorporated on October 22, 2002, is a global technology company. The Company’s business is primarily focused around key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. The Company generates revenue primarily by delivering online advertising. The Company also generates revenues from Motorola by selling hardware products. The Company provides its products and services in more than 100 languages and in more than 50 countries, regions, and territories. 

Considering the stocks lowest P/E ratio over the past 5 years of 21.73, the present price of the stock assumes that the earnings of Google Inc. will grow by roughly 5.8% over the next 5 years, giving us a 2019 price of $552. However, public information tells us that earnings have been growing at and annual rate of 61% over the past 10 years and 26% a year over the past 5 years. Using a more realistic number of 24%, the company is now worth $1,256 per share for a 5 year holding period.

That is a more extreme example but using 4 different valuation methods and relatively conservative assumptions regarding the future growth of the earnings of the company, we got an average price of $847 per share.

The two models that are based on the earnings tend to provide a higher estimate than the ones based solely on free cash flows. This point might prove to be a cause for concern in the long term. Even if it's not a screaming Buy, the company however seems to present a discount based on it's current price. Only time will tell which valuations method is right.

Disclosure: The author has no position in GOOG or GOOGL.

How much do you think Google Inc. is worth?

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