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Google Stock Analysis - is Google Stock a Good Buy? Best Investments Series - YouTube
Channel: Learn to Invest - Investors Grow
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hi I'm Jimmy in this video we're looking
at alphabet Incorporated ticker symbol
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goog and googl yes they have two but
we'll come back to that in a minute okay
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our goal with this video is to try to
take a basic look at alphabets business
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and then try to see if we can determine
the fair value of Google's stock okay
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now now I'm sure we all know that
alphabet is Google so from here on out
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I'm just gonna call it Google okay so
how about we start at the basics of
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Google's business so Google breaks their
business into two main segments they
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have Google and then they have other
bets now I'm not sure why they do it
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this way because this is the way their
chart ends up look so as we could see
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using 2018 revenue the Google segment
represents ninety nine point six percent
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of all revenue so Google classifies
other bets as emerging businesses that
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are in various stages of development and
in theory they're in large industries
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that have huge upside potential if they
work out but they're small right now so
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they don't really affect what Google's
doing all that much now when we jump
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over the Google segment now here they do
go one step further and break it into
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Google properties and Google Network
member properties so this does give us a
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bit more color there not too much more
so in the Google properties they have
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lines of business like google.com or
YouTube or Google Maps or the Google
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Playstore and things along those lines
the Google Network member properties
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well that's where revenue from external
sites go usually using platforms like
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AdMob or Google Adsense and clearly the
Google Network member properties isn't
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as big as Google properties themselves
but they're still quite large they
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generate just short of about twenty
billion dollars in revenue in 2018 while
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Google properties generated about a
hundred billion just short of a hundred
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billion last year okay so before we try
to come up with a fair value for Google
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stock let's look at why they have two
different stock tickers so Google stock
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is actually broken into three different
stock classes they have Class A Class B
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and Class C these are the number of
shares that are
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available for each of those Google stock
classes I've rounded them but they're
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close now we'll see in a second it's
not gonna matter all that much anyways
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so there used to be just two classes of
Google stock they had Class A and Class B
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then back in 2014 Google split Class A
into two different groups Class A and
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Class C Class B shares are not publicly
traded they're the ones that are mostly
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owned by Larry Page and Sergey Brin of
the founders of Google okay simple
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enough but here's where things get
somewhat interesting so as we know when
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we buy shares of a public company
well we become a part owner of that
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company and one of the benefits of
ownership is generally we get to vote at
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the annual shareholder meeting we get to
vote for things like who's on the board
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of directors in high-level items like
that
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well some companies that doesn't exactly
work out that way Google is one of those
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examples of where it's a bit different
here so Class A shares well they get one
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vote for every share that they own
simple enough
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that's typically the way it works with
most stocks okay then Class B well they
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get 10 votes for every share that they
own so right away we can see that the
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Class B shares get the majority of the
votes and we can't forget that Class B
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shares are not publicly traded we can't
we can't get those shares and then Class
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C well they don't get any vote at all so
Class A shares are represented by the
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ticker goog L and Class C shares are
represented by the ticker goog and if
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we're curious this is a chart of Google
stocks above both shares a and C
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side-by-side and as we can see they look
pretty much the same they're very close
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to each other as of last I saw they were
about a dollar apart so they're moving
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virtually side-by-side now we may ask if
Class A gets voting rights and Class C
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doesn't get voting rights why isn't
class a more expensive and the real
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answer to this is that it doesn't matter
all that much anyways because Glac Class
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B ultimately controls the company page
and Brin can't be out voted so what's
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the difference if we own Class A or
Class C now personally I think that
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these two share classes are not equal I
prefer Class A shares of a Class C but
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here's why
so Google has a buyback program and
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generally when they're doing their
buybacks they're buying back Class C
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shares in fact Google bought a back
about twenty-two billion dollars worth
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of stock of Class C shares in the past
five years so we might say okay great
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that sounds like a decent thing for
Google stockholders or at least Class C
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stockholders
don't forget goog is Class C but when we
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look at the shares outstanding today
versus the way they were in 2015 for the
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Class C shares well they're actually
more shares now despite the fact that
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they've bought back twenty-two billion
dollars worth of stock why you asked
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well generally employee stock options
and if cup of Google were to make an
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acquisition well those are Class C
shares that are getting issued so
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essentially all of the buybacks all
they're really doing is offsetting the
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Google stock options or the employee
stock options and in the acquisitions
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that the companies make now I bring this
up not because it's a huge deal mostly
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because I want us to be aware that if
they ever stopped those buybacks
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well the shares are likely to continue
to be issued and that could ultimately
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drive the price of the two stocks a bit
further apart where I think Class A
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shares will prove to be a bit better at
that point but that's just my opinion
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okay so let's dive quickly into the
financials and then we'll try to come up
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with a fair value for Google stock so
this is Google's revenue and as we could
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see they've done a fantastic job of
growing revenue over the past five years
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or so they've had a compounded annual
growth rate of about twenty percent so
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it's been fantastic growth overall for
Google stock now when we jump over to
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profits well here we could see that
Google's net income is once again quite
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good except for the noticeable dip back
in 2017 this dip was due to changes in
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the US tax law and Google had to add on
a tax bill of about nine point nine
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billion dollars that's why you see that
dip in profit there how about margins
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well when we jump over to net income
margins we could see that after 2003 and
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2004 net income margins have been fairly
solid in the 20% plus area for a while
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in fact if we calculate the average over
this time period we could see the
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average o average
net income comes in at slightly better
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than 21% how about free cash flow once
again Google's done a pretty good job of
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maintaining solid free cash flow and I
know for anybody who's been in this
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channel before knows that I'm a big fan
of using discounted cash flow to try to
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value a company's stock so how about we
try DCF for Google stock right now
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so this is a result of the discount of
free cash flow analysis that we've done
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for Google stock now if you're wondering
how to do this type of analysis I
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actually have a full step-by-step guide
as to the exactly what you need to do to
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come up try to come up with this fair
value so if you're interested in try to
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come up with this fair value on your own
while I created an excel template it's
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free it's there's a link in the
description below
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to that website just throw in your email
address and I'll send it over you okay
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so I'm gonna run through these numbers
real quick and then I want to bring out
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something that tripped me up when I was
first starting to research Google stock
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okay so these are estimates and I took
these from analyst estimates that I
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could find so for the required rate of
return I actually used 8% now this is a
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bit lower than I typically like to use
but Google has a fairly strong balance
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sheet and in theory a stronger company
would require a lower required rate of
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return so for me it made sense to use
this for Google stock I think eight
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percent is a bit better than the eight
and a half percent that I typically like
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to use usually I'll use eight and a half
to nine percent eight percent I think
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makes sense for me here now one point
regarding the strength of Google's
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balance sheet for anybody who was been
watching Google stock we may have
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noticed that there was a big jump in
their long-term debt so this is a
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quarterly chart of long-term debt going
back the past couple years and as you
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may notice there's a huge jump in the
first quarter of 2019 but when we done
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it bit deeper it turns out that this
jump was actually from an accounting
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change that Google adopted in the
beginning of 2019 with this accounting
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change some leases are now accounted for
as both an asset and a liability hence
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the reason this liability shows a giant
jump now it's somewhat irrelevant
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because when we add cash and cash
equivalents and short term investments
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to this chart we can see things have
gotten the the things
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significantly better it's somewhat
irrelevant whether they have 14 billion
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in debt or 4 billion in debt with the
amount of cash that they're sitting on
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ok jumping back to our DCF calculation
next we used a perpetual growth rate of
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about 2.5 percent it's typically where I
like to be between two and two and a
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half percent well that gives us a fair
value of the stock I've bought 1454
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that's of course assuming we believe the
analyst projections and we agree with
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the discount rate and our perpetual
growth rate now when I first did this
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analysis I actually got tripped up
because of the shares outstanding and
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when we go over the Yahoo Finance and we
pulled their statistics page well this
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is what we're gonna see and I came
across two shares outstanding simple
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enough and for some crazy reason I
simply copied the shares outstanding
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into our excel template and got a fair
value result of something like 3,300
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dollars per share now yes DCF valuation
or any valuation for that point is just
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an estimate but that would be way off
considering where the current stock
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price is so it turns out that these
stock the share class difference that we
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talked about before
well that is playing a huge role in our
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valuation right now see this is goog L
and it has about 300 million shares
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outstanding and then if we jump over to
goog there we can see that's an
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additional 340 million shares
outstanding now there are also Class B
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shares and those should be included in
this whole mix as well so when I did the
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DCF valuation I added all three together
to come up with the proper number of
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shares outstanding now if you're looking
for the most accurate way to get these
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numbers instead of jumping from Yahoo
Finance or wherever whatever site we're
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using the company's most recent 10k or
10 Q generally on the first a second
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page will have the numbers listed as of
the end of that quarter or annual number
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whatever it is those are generally the
most accurate numbers to use those are
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the numbers I used for our DCF valuation
okay so based on where Google's stock is
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currently trading and our calculation of
discounted cash flow Google's growth
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they have solid net profit margins they
have a very strong balance sheet I
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actually think that Google could make a
good addition to a lot of value
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portfolios and maybe even it's a few
both portfolios I think right now they
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seem fairly reasonably priced now their
p/e ratio is a little bit high it said
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about 24x versus the S&P which is about
18 X or 19 X so it's a little on the
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high end but given its overall situation
given how strong the company is I think
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it deserves to be up where it's at
possibly even higher but what do you
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think do you agree that Google stock
looks pretty good pretty attractive at
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this price right now please let me know
what you think in the comments below
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yeah have been done so yet hit the
thumbs up it really helps the videos
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out thank you for a stick with me all
the way to the end of the video and I'll
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see in the next video thanks
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