How To Value Alphabet Inc Stock Today

  • There is no right way or wrong way to value a stock.
  • Valuation is very simple and we will use Alphabet Inc as an example.
  • I will show you realistically that any value inputted into a model is valid as long as you have a reason.

So, you want to value your first stock and hopefully hit it big to join the ranks of the Wall Street elite, but it seems too intimidating and complicated. Your feelings are understandable. However, keep in mind the complexity of valuation comes in when you try to drill down and create more and more assumptions.

Without further ado, let's get started with one of the most visible stocks out there, Alphabet Inc-C (NSDQ:GOOG) Alphabet (NSDQ:GOOGL).

I will do a simple PE valuation model to find the intrinsic value of Alphabet Inc. Intrinsic value just means what I think the investment is worth.

Primer

Before I get started, let me give you a quick primer. The basis of valuation revolves around the present value formula seen below. If you understand this formula, you will be able to understand variations that occur when you attempt to value a stock.

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(Source: Stockodo.com)

For example, if I say I want to use a dividend model, residual income model, free cash flow model, and so forth, it might seem like a lot to absorb.

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(Source: Subjectmoney.com)

However, it is just a matter of understanding what to put in the numerator and denominator when the method is tweaked. For instance, the formula suggests the use of dividends in the numerator and a required return number in the denominator. If I wanted free cash flows, I could stick with free cash flows in the numerator and WACC (weight average cost of capital) in the denominator, which is nothing more than the average of all the claimants' required returns on the firm.

Alphabet Inc Stock Valuation

Below is my spreadsheet of the PE valuation. I will try to keep it as simple as possible using a 5 year projection.

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(Source: Spreadsheet self created.  Highlighted variables from Yahoo Finance)

To begin the valuation, I got a trailing PE ratio from Yahoo Finance. Trailing implies that the value is for the immediately preceding twelve months. There is a forward PE, but I did not use it. I would rather look at what has happened and not at what a select few (analysts) think will happen.

The earnings numbers are twelve month trailing earnings. I like this because you are getting 1 years worth of data which gets updated quarterly. It keeps you up-to-date.

Next, I look at the earnings growth. What do I think will happen with the company? Have I done my due diligence? Have I thought of everything humanly possible? What does history say? What are others thinking about the company? These are the questions many will ask. I just used the average five year earnings growth rate and assumed that it would continue in the future. That value might seem crazy to you, and to others it may seem reasonable. It all depends on what you believe, as long as there's a rationale.

Next, I determined the discount rate. You can use a 10 year government bond as a baseline, you can use a rate you desire, you can make it nominal provided you do the same to your numerator, etc. This really becomes an exercise in creativity. Nothing wrong with that, it helps you find what works for you. Since the company is growing at 11.20% and I want to achieve a 12% annual return, what should the current stock price be? I went with 12% because 10% has been the annual returns on stocks and I did not want to be too aggressive.

Thus, when I multiply the 5 year projected earnings value by the PE ratio, it shows us that the Alphabet Inc. stock should be valued at around 1355 dollars in 5 years. Because we are interested in the current price of the stock, we take the present value of this number by using 5 years .

Since the stock is currently trading around 800 dollars, the stock is overvalued.

I can run the calculations again and come up with a different value. If I change the growth rate to 6 percent, look what happens. My intrinsic value of the stock just decreased further.

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(Source: Spreadsheet self created.  Highlighted variables from Yahoo Finance)

If you really want to see the differences in values, try using price-to-sales, price-to-book, etc. Bottom line, do what you feel comfortable with and have fun in the process.

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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

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Comments on this article and GOOGL stock

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Jack Smith
bullish
No it is actually cheap
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Do share this awesome post