How Much Is Google Worth?

Shares of Google ($GOOGL) have been sliding lower since the late summer. The stock recently dipped below $500, and is now near a 13-month low. Google shareholders aren’t used to seeing a lot of pain, at least not since the Financial Crisis.

Here’s a look at Google’s share price along with its earnings-per-share. The black line is the stock and it follows the left scale. The gold line is EPS and it follows the right scale. The two lines are scaled at a ratio of 20-to-1 which means that whenever the lines cross the P/E Ratio is exactly 20. I don’t mean to suggest that 20 is the proper valuation for Google; this ratio simply makes the chart most readable. The future portion of the yellow is Wall Street’s consensus.

So where should Google’s price be? That’s not an easy question, but let’s try to make some reasonable estimates. According to Yahoo Finance, the consensus on Wall Street is that Google will make $30.28 for 2015. That’s a 17% increase over 2014’s earnings (remember, of course, that they still have to report Q4).

The estimated five-year earnings growth for Google is 16.99%. If we take my world-famous World’s Simplest Stock Valuation Tool (Forward P/E = half the growth rate plus eight), that gives us a fair value of $499.63. Since we’re among friends, let’s round that to $500 per share.

Looking into the balance sheet, there are a few items that work in Google’s favor. First, the company has $60 billion in cash, which works out to $88.53 per share. That’s roughly one-sixth of the share price. Obviously, that cash in the bank is barely earning Google any money. The vast majority of the earnings power comes from operations which are roughly valued at $412 per share. On the other side of the balance sheet, Google has $8.6 billion in debt which is easily manageable. Google is in no danger of financial trouble.

Google is going for an attractive valuation, but the big question is earnings. The company has missed Wall Street’s estimate the last four quarters in a row, and those misses have grown steadily larger, rising from 1.5% to 2.8%. That’s not all. In the last three months, the estimate for full-year 2015 has drifted lower by $1.16 per share. So you can see why the stock has suffered.

The search engine reports in another two weeks. If they deliver a major earnings beat, then I think Google will have shown Wall Street that it can hit those optimistic earnings forecasts. For now, I rate Google a buy anywhere below $510 per share. Stay tuned for earnings on January 29.

Posted by Eddy Elfenbein on January 13th, 2015 at 12:02 pm

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