Alphabet Inc Class A DCF Valuation: Is The Stock Undervalued?
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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 Class A (GOOGL).
Profile
Alphabet Inc. is a multinational technology conglomerate specializing in internet-related services and products. The company operates through three primary segments:
- Google Services: Includes core businesses such as Google Search, YouTube, Gmail, Google Play, Google Maps, and the Android operating system.
- Google Cloud: Provides cloud computing services, enterprise solutions, and Google Workspace.
- Other Bets: Encompasses Alphabet’s experimental ventures, including Waymo (autonomous driving), Verily (life sciences), and DeepMind (AI research).
Alphabet generates the bulk of its revenue from digital advertising, supplemented by cloud services, hardware sales, and subscription-based products.
Recent Performance
Over the past twelve months, Alphabet’s share price has increased by 30.41%, reflecting strong growth in advertising, AI advancements, and cloud computing revenue.
Source: Google Finance
DCF Valuation Inputs
- Discount Rate: 9%
- Terminal Growth Rate: 3%
- Weighted Average Cost of Capital (WACC): 9%
Forecasted Free Cash Flows (FCFs) in Billions
| Year | FCF ($B) | Present Value ($B) |
| 2025 | 80 | 73.4 |
| 2026 | 88 | 74.1 |
| 2027 | 96.8 | 74.5 |
| 2028 | 106.50 | 74.6 |
| 2029 | 117.1 | 74.4 |
Total Present Value of FCFs = $371.0 billion
Terminal Value Calculation
Using the perpetuity growth model:
Terminal Value = (FCF in 2029 × (1 + Terminal Growth Rate)) ÷ (Discount Rate – Terminal Growth Rate)
= (117.1 × 1.03) ÷ (0.09 – 0.03)
= 120.61 ÷ 0.06
= $2,010.2 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value ÷ (1 + WACC)^5
= 2,010.2 ÷ (1.09)^5
= 2,010.2 ÷ 1.5386
= $1,306.5 billion
Enterprise Value Calculation
Enterprise Value = Total Present Value of FCFs + PV of Terminal Value
= 371.0 + 1,306.5
= $1,677.5 billion
Net Debt Calculation
As of December 31, 2024:
- Total Debt: $28.14 billion
- Total Cash: $95.66 billion
Net Debt = Total Debt – Total Cash
= 28.14 – 95.66
= -$67.52 billion (Net Cash Position)
Equity Value Calculation
Equity Value = Enterprise Value + Net Cash
= 1,677.5 + 67.52
= $1,745.0 billion
Per-Share DCF Value
- Shares Outstanding: 12.29 billion
Per-Share DCF Value = Equity Value ÷ Shares Outstanding
= 1,745.0 ÷ 12.29
= $141.97
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $141.97 | $173.02 | -17.95% |
Based on this updated DCF valuation, Alphabet appears overvalued. The estimated intrinsic value of $141.97 per share is lower than the current market price of $173.02, resulting in a -17.95% margin of safety.
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