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Running The Numbers – Henry Blodget’s Negative View On Google ($GOOG) DRAFT

This valuation was initial working for this blog post:

http://blog.valuecruncher.com/2008/10/running-the-numbers-henry-blodgets-negative-view-on-google/

Running The Numbers – Henry Blodget’s Negative View On Google ($GOOG)

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/10/running-the-numbers-henry-blodgets-negative-view-on-google/

Running The Numbers – Google (GOOG) Looks A Buy

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/09/running-the-numbers-google-goog-looks-a-buy/

Assumptions

Our assumptions are revenues of US$22.25 billion in 2008 growing to US$33.75 billion in 2010. We have used a flat EBITDA margin of 40% to 2010. We used a terminal growth rate of 6.0%. We used a terminal capital expenditure number of US$4.0 billion. We have used a WACC (discount rate) of 10.0%. All of these assumptions can be amended in the Valuecruncher on-line model to adjust the valuation.

Our analysis incorporates the cash on the GOOG balance sheet – Valuecruncher calculates a net debt number.

Google (GOOG) worth US$1,000+ a share today – you must be dreaming

This valuation is part of this blog post:

http://blog.valuecruncher.com/2008/07/google-goog-worth-1000-a-share-today-you-must-be-dreaming/

A US fund manager Manning & Napier has come out with an amazing call in Barron’s that their current view of the Google (GOOG) share price equates to US$950-1,050. Henry Blodget works through some of the assumptions and is not convinced.

Neither are we.

We took the assumptions from Henry Blodget’s analysis in Silicon Alley Insider and ran these through the Valuecruncher on-line valuation tool to see what sort of numbers are required to justify a US$1,000 a share valuation for GOOG.

Assumptions – for a US$1,000 a share valuation for Google today

We started with a 2008 revenue number of US$22.5 billion – and then grew that at 30% per annum to 2010. We used a 40% EBITDA margin on these revenues. We used a US$4.25 billion terminal capital expenditure figure. For a discount rate (WACC) we used 10%.

These are aggressive projections for the period to the end of 2010. But where things get really wild is in determining the terminal growth rate. This is the rate that reflects the growth potential beyond 2010. To achieve a valuation over US$1,000 a share we have needed an 8% terminal growth rate. This is a big number. How big. To get to an 8% terminal growth rate requires a 30% growth rate from 2010 to 2011 then dropping to 6% in perpetuity from 2015. The growth numbers look like 24% in 2012, 18% in 2013, 12% in 2014 and 6% in 2015 and beyond. 6% is a big perpetuity number – 8% is huge. Play with the assumptions and see the impact. Note: in our model the terminal growth rate must be more than 2% below the discount rate. In this example we come up against this constraint.

Here is the link to the analysis...

http://www.alleyinsider.com/2008/7/google-goog-worth-950-1-050-says-nutbag-fund-manager