I have posted about Google before; some good, some not-so-good stories. The classes of shares and corporate responsibility were interesting, but its phenomenal growth has been more interesting.
Since 2003, revenues have grown annually compounded at 48% and for the last five years they have grown at close to 25%. It had revenues of $50 b in 2012, book operating profit of $13 b and $48 b of cash; cool! Return on capital has been consistently high and there is negligible debt.
All this has translated into high market value of its equity of $350 b from $86 b in 2009.
It is only behind Apple and Exxon Mobil now in terms of market-cap. The run-up has been sharp if we compare the multiples over the period. However, we know that these multiples and market values are meaningless if we look from the point of view of investment (the intrinsic value). Business valuation is what matters then.
It has $10 b of goodwill sitting on its balance sheet which represents its faith that its past acquisitions are going to generate cash.
That brings us to question whether the current market value for Google is fair based on its future cash flows potential and risks.
Google claims to be a technology leader focused on improving the ways people connect with information; and aspires to build products and services that improve the lives of billions of people globally. In this regard, it has significantly exceeded my expectations. Today, Google is an educational institution. Its search tool has been of great advantage as a lot of information and knowledge is gained through it by anyone sitting anywhere. With all the crap that is being taught at schools and colleges, formal education has become only a means to take up employment. Google has helped people pursue their areas of interest and passion; have fun in the process, and also make money. It is difficult to imagine life without the Internet and Google now. Everyone uses Google is an understatement.
Google's revenues comprise predominantly advertising, with marginal contribution from Motorola Mobile coming from 2012.
Google's value will depend upon how much of its online advertising market share it would have to cede to its competitors, more importantly to, Facebook, LinkedIn, Twitter and Yahoo, in future. As these firms become more prominent the obvious would be smaller pie for Google both in terms of revenues and margins.
It is anybody's guess, though, about the total market size and Google's share in future. Difficulty in estimating revenues and margins makes its valuation exercise futile. Nevertheless, I wanted to have some fun based on my estimates of revenues, margins and reinvestment needs to get its value. The value came far too lower than its current market value; I had a lot of fun, though.
Google will see significant reduction of, yet reasonably high, operating margins and return on capital in future. It is currently spending a large portion (13.5% of revenues) on research and development. We don't know what products are in the pipeline; but we do hope that they are as good as the other products have been and continue to be.
All this has translated into high market value of its equity of $350 b from $86 b in 2009.
It is only behind Apple and Exxon Mobil now in terms of market-cap. The run-up has been sharp if we compare the multiples over the period. However, we know that these multiples and market values are meaningless if we look from the point of view of investment (the intrinsic value). Business valuation is what matters then.
It has $10 b of goodwill sitting on its balance sheet which represents its faith that its past acquisitions are going to generate cash.
That brings us to question whether the current market value for Google is fair based on its future cash flows potential and risks.
Google claims to be a technology leader focused on improving the ways people connect with information; and aspires to build products and services that improve the lives of billions of people globally. In this regard, it has significantly exceeded my expectations. Today, Google is an educational institution. Its search tool has been of great advantage as a lot of information and knowledge is gained through it by anyone sitting anywhere. With all the crap that is being taught at schools and colleges, formal education has become only a means to take up employment. Google has helped people pursue their areas of interest and passion; have fun in the process, and also make money. It is difficult to imagine life without the Internet and Google now. Everyone uses Google is an understatement.
Google's revenues comprise predominantly advertising, with marginal contribution from Motorola Mobile coming from 2012.
Google's value will depend upon how much of its online advertising market share it would have to cede to its competitors, more importantly to, Facebook, LinkedIn, Twitter and Yahoo, in future. As these firms become more prominent the obvious would be smaller pie for Google both in terms of revenues and margins.
It is anybody's guess, though, about the total market size and Google's share in future. Difficulty in estimating revenues and margins makes its valuation exercise futile. Nevertheless, I wanted to have some fun based on my estimates of revenues, margins and reinvestment needs to get its value. The value came far too lower than its current market value; I had a lot of fun, though.
Google will see significant reduction of, yet reasonably high, operating margins and return on capital in future. It is currently spending a large portion (13.5% of revenues) on research and development. We don't know what products are in the pipeline; but we do hope that they are as good as the other products have been and continue to be.
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