I love Google. I’m certainly biased. Google has changed my life, and is the reason I’m writing this blog post. Over 12 years, I made Android apps and Google helped me monetize, distribute, market, support, analyze and test these apps. This month I’ve sold these apps, which certainly leaves me with mixed emotions, and leaves me with the proceeds to invest. While my Google exposure dropped to almost zero in one day, I still love the company.
So let’s talk about GOOGL stock. What’s a fair price to pay for it?
Does Google have any debt? No. Google has $142B in cash and $14B in long term debt.
How has Google done historically? The graphs all look amazing. They almost look fake. The five year CAGR is 29.9% and the ten year CAGR is 22.1%.
That’s great, so what should we pay for it? Well, the trailing twelve months (TTW) net income is $70.6B dollars. The CAGR we’ve seen for ten years is 22.1%. If we paid a P/E of 22, that would be a valuation of $70.6B * 22.1 = $1,560B. There are 663M shares of GOOG(L). So the value per share assuming the next ten years look like the last ten years would be $1,560B / 663M = $2,353.
What if you think the next five years will be as great as the last five years? Running the same numbers but with a 29.9 P/E, you get $3,384.
For reference, the current P/E of the S&P 500 is 30. (Although it is anticipated to drop to 24 after Q4 earnings are reported)
I believe the fair value of Google is somewhere between $2,353 and $3,384. Today Google is trading at $2,897 which I believe is either 23% overvalued or 16% undervalued based on the last five and ten year compound annual growth rate (CAGR).
Bullish case: I can currently acquire GOOGL cheaper than I can the S&P 500! GOOGL has been an awesome partner for me. I’ve been to campus multiple times. I’ve met the people that work there. I believe in the management of Google. While 20% growth for another twenty years is going to be hard to impossible for Google to pull off, I like search, I like Nest, I like Google Home, I love YouTube, I like Android, I like Chrome and I love AdMob. Don’t forget Waymo. Don’t forget the pattern recognition research. Don’t forget quantum computing. I love that Google makes money. Lots and lots of cold hard cash. This isn’t Amazon. This isn’t super sexy, this is just money printing. If Google can keep growing at 20% year, for just four more years, and then stop growing but not shrink, it’ll still be worth this high price you are paying today.
Bear case: 29.9 is a crazy high P/E on a mature company. To make matters worse, Google just set record TTM net income and revenue. That’s a 29.9 P/E on top of the best the company has ever done! Realistically, Google could see ad revenue’s drop. YouTube starts losing out to TikTok. Apple finally makes a $200 iPhone. Google spends billions going green with revenues falling. Google’s revenue could drop to 2019 levels. Growth could flatline. What’s a 2019 Google with little growth worth? About $500/share. That’s an 83% drop. That’s almost a complete wipe out of your money.
My strategy: I’m long Google. I had most of my net worth tied up in Google for 12 years, so I’m comfortable with the risk. I’ve had great success with the company. Do I wish the stock was cheaper? Of course. The stock is by no means cheap. Cheap would be somewhere around the $1500-$2000 share. However, I look around and don’t see a better opportunity out there. For that reason, Google is my largest holding at 7.6%. If they grow at 20% for four years, I break even. If they grow at 20% for 20 years? Ummm, they’d be a $140T company. That doesn’t seem likely. 😂
My exit: I really don’t want to sell. But here are some reasons I would. If I find myself going to Bing.com instead. If GDPR style laws eventually kill online advertising. If Google’s stops being a world leader in technology. If someone else unseats Google for online advertising.