We have performed a Discounted Cash Flow valuation of Google and arrived at an intrinsic value of $673.56. We used a beta of 1.24 and a Weighted Average Cost of Capital (WACC) of 11.43%. Finally, we have calculated three-stage free cash flow to firm valuation and determined the stable growth rate of 2.5% p.a.
We have performed a sensitivity test of the stock price varying the Stable Growth Rate and Beta and we arrived at a range of $631.5-$711.6. This is a fairly wide range and hence it is quite difficult to use this in decision making process.
The current price of the stock is $644.71 and therefore we recommend a BUY for this stock.
Background InformationGoogle was incorporated in California in September 1998. It generates revenue primarily by delivering relevant, cost-effective online advertising. Google reported revenue USD $10.6 billion in 2006 and net income $USD 3.08 billion, increased by 110% from net income in 2005.
In the 4th Quarter of 2006, Google acquired YouTube, a consumer media company for people to watch and share original videos worldwide through a web experience. Google recognizes as revenue the fees charged advertisers each time an ad is displayed on the YouTube site.
Valuing GoogleTo evaluate the value of Google using DCF, we need to drill down to the Google's financial statements and future cash flows. To determine the share price is good enough for the share holders, we initially determine the future cash flows of the firm and further determine the probable growth rate of the Google. Table 1 below summarizes the company's cash flow statements for the past 4 years. The minimal 5-year forecast was assumed for the high-growth period, thus we are not extending the forecast to make the growth rate relevant. Included also in this table is a forecast...