Analysis,Educational | January 27, 2021

Company valuation: Google stock analysis

Google Stock Analysis

Today, we’re going to talk about Google – the world biggest search engine.

We’re going to analyse the stock over 3 points. Firstly, understanding the business, secondly about competitive advantage and thirdly about the management team.

Understanding the business

Luckily for us, Google’s business is not particularly hard to understand, because so much of their revenue just comes in from digital advertising.

In Q3 2020, they made $46.2 billion worth of revenue, of that, $37.1 billion was from advertising, so 80% of their revenue just from advertising.

They do this through Google search, YouTube ads, and Google Network Members’ properties.

Over the next decade, digital advertising, it’s predicted to grow in popularity, according to Roby Cornalba, at Wecomex, that digital advertising will make up over 60% of all forms of advertising by 2022.

Beyond digital advertising, Google also generates a significant amount of revenue from their cloud business, that is also predicted to grow very healthy into the future, as more businesses around the world transition to cloud-based computing solutions.

Furthermore, they also generate about $5 billion a quarter in other revenues, for instance, the subscription services and app revenue. That makes up about 12% of their quarterly revenue.

Let’s flip over and have a look at their financials.

The financials

When we look at their financials, there is one consistent theme.

First of all, they’re a financial fortress, they’ve got a very long history of steady growth and amazing cash flows.

We can see that the cash flows generated from their business consistently increase year on year.

Google has just adds wads and wads of cash to their cash pile every single year.

Q3 2020 shows that Google’s cash position plus their short-term marketable securities is up to $132 billion and you can see how this number has grown over time.

This ability to consistently add huge amounts of cash every year to their cash pile has led them to amass total current assets of $164 billion and total assets of almost $300 billion.

When we then look at what does Google owe to other people or other entities, they don’t really owe very much at all. In fact, they’ve only got $13 billion in long-term debt and $86 billion worth in total liabilities.

They could eliminate all of their liabilities without touching any of their business operations and still have $46 billion left over.

The competitive advantage

A long track record of healthy growth over time, could be considered an indicator of competitive advantage.

In Google’s case we can see a 10-year compound annual growth rate of:

  • 21.2% revenue,
  • 17% for earnings per share,
  • 19% for equity,
  • 13.8% for free cash flow.

In these four key numbers, Google has been able to maintain an annual growth rate above 10% for over 10 years.

This confirm that Google has just been able to growth and no company has been able to interrupt that growth.

The Management team

Google has a very competent management team.

Not only, they have been able to pull off the necessary moves to continue to build on their economic moats but they’ve also been very effective at reinvesting back into their own business.

They’ve been very good at managing the company’s debt to make sure that as an investment Google is very low risk.

Firstly, talking about reinvesting back into the business. Over the past 10 years Google’s Return On Investor Capital has averaged out to 16.6% each year.

Now the ROIC tells us the management’s efficiency at allocating the capital under their disposal towards profitable investments. Typically speaking, we love to see this number over 15% each year and Google excels here. They absolutely beat the 15% and over a very long period of time.

Debt management

We look at the Current Ratio and the Debt to Equity Ratio.

First of all, we look at the Current Ratio, we want to see if that there’s a lot more in the current assets than in the current liabilities. It’s definitely the case with Google, they’ve got $152.6 billion worth of current assets versus just $45.2 billion of current liabilities.

Looking at the debt to equity ratio, Google is just one of those cases where it’s unbelievable. They’ve got long-term debt of just $13 billion, when you consider the cash they have the debt to equity ratio is going to look fantastic.

They’ve got a debt to equity ratio of 0.1

Which means, they’ve got 10 times the equity to what they currently have in debt.

This just reduces the risk of bankruptcy for the company, it’s a good sign that shows the management team is handling debt well.

To conclude

Google tick the boxed in all the right areas. They operate in a growing industry, the digital advertising, their financials are solid, the management team is really competent.

 

Research provided by Roby Cornalba, Digital Specialist at Wecomex.com

The given data provided contains additional information, forecasts, analysis and market reviews published on the Key to Markets website.

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