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As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, Alphabet Inc (GOOG).
 

Profile

Alphabet is a holding company. Internet media giant Google is a wholly owned subsidiary. Google services account for nearly 90% of Alphabet’s revenue, of which more than 85% is from online ads. Other Google services revenue is from sales of apps and content on Google Play and YouTube, as well as sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home. Goolgle’s cloud computing offerings account for a bit more than 10% of total Alphabet revenue. Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), provide faster internet access (Google Fiber), enable self-driving cars (Waymo), and more.
 

Recent Performance

Over the past twelve months the share price is up 57.48%.

GOOG data by YCharts

Inputs

• Discount Rate: 9%
• Terminal Growth Rate: 2%
• WACC: 9%

Forecasted Free Cash Flows (FCFs)

Terminal Value

Terminal Value = FCF * (1 + g) / (r – g) = 1494.74 billion

Present Value of Terminal Value

PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 971.48 billion

Present Value of Free Cash Flows

Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 338.23 billion

Enterprise Value

Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 1309.71 billion

Net Debt

Net Debt = Total Debt – Total Cash = -12.18 billion

Equity Value

Equity Value = Enterprise Value – Net Debt = 1321.89 billion

Per-Share DCF Value

Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $106.09
 

Conclusion

Based on the DCF valuation, the stock is overvalued. The DCF value of $106.09 per share is lower than the current market price of $144.35. The Margin of Safety is -36.06%.

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