Larry of http://www.intelligentinvestors.org
Right now, Google seems to be valued by its growth in revenue (1). However, the important question to an investor always has been, what kind of cash is the company bringing in? By free cash flow standards I believe Google is an extremely cheap company.
Google is one of the only brands in Interbrand’s top ten to grow its brand value by double digits, besides HP (Google: 36% and HP: 12%) (2). It is ranked #4 overall and growing at the pace it has been (approximately 39% on average the last 5 years) it will overtake Coca-Cola as the #1 brand in 2 years. Google will lead the pack in cloud computing (the power of their Chrome OS can not be overstated: CNET on Chrome), its Android phone is quickly capturing market share, Google TV is just starting to take hold, and don’t forget web advertising (3) among other things (see: what else Google owns). It is safe to say Google will not lose relevance within the next 5-10 years and in fact appears only to be gaining relevance.
In terms of free cash flow*, Google has seen growth of about 82% per year since 2002. Its market cap (EOY) has ranged from as high as 72x FCF to as low as 23x FCF. Right now it is trading at about 22x. If Google has seen 82% FCF over its life and around 55% growth in the last 4 years why is it only being valued as if its free cash flow growth will not continue? Even by conservative measures, assuming a free cash flow growth of 40%, this puts the value in 2013 at around $1475 per share. Investors, it appears, expect it to be worth around $1000 by then. Being less conservative and assuming 50% growth, Google’s price per share could easily reach $1813. Given that the future of Google only looks brighter it seems reasonable to assume that its growth will be anything but conservative (4).
It is fairly obvious that a company as established as Google with such a large potential for future growth is not being valued correctly. While investors are outrageously valuing cloud computing stocks (5) Google sits mostly unnoticed. It seems investors think Google’s best days are behind it; seems to me the perfect time to invest.
Note: If you are interested in learning more about Google in regards to free cash flow check out this other excellent article by a SeekingAlpha member here.
*Free cash flow data provided by Morningstar.com
Disclosure: No position