Fundamental Analysis Group iStock Google Final

8/9/2019 Fundamental Analysis Group iStock Google Final

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Fundamental Analysis _ Google Inc.

Advanced Finance _ K48 1

CONTENTS

I. BACKGROUND........................................................................................................................ 3

II. ECONOMIC ANALYSIS. .................................................................................................. 4

III. INDUSTRY ANALYSIS...................................................................................................... 6

1. Background ............................................................................................................................................ 6

TABLE 1: INDUSTRY STATISTICS. ........................................................................................... 6

2. Major Competitors ................................................................................................................................ 7

TABLE 2: MAJOR COMPETITORS............................................................................................. 7

3. Growth: .................................................................................................................................................. 7

4. Industry life cycles ................................................................................................................................. 8

5. Porters five forces: ................................................................................................................................ 8

5.1. Bargaining power of Suppliers: ......................................................................................................... 8

5.2. Potential entry of New Competitor:................................................................................................... 8

5.3. Rivalry among Competing Firms: ..................................................................................................... 9

5.4. Threats of Substitutes: ........................................................................................................................ 95.5. Bargaining power of Buyers: ............................................................................................................. 9

IV. COMPANY ANALYSIS.................................................................................................... 10

1. Screening ratio. .................................................................................................................................... 10

2. Financial statement analysis. ............................................................................................................... 10

2.1. Current financial situation. ............................................................................................................... 10

2.2. Profitability analysis........................................................................................................................... 11

2.2.1. Profit margin............................................................................................................................. 11

2.2.2 ROA ............................................................................................................................................... 13

2.2.3 ROE................................................................................................................................................ 13

2.3. Liquidity analysis. .............................................................................................................................. 14

2.4. Leverage ratios. .................................................................................................................................. 14

3. SWOT Analysis .................................................................................................................................... 14

3.1. Strengths: ........................................................................................................................................... 14

3.2. Weaknesses:........................................................................................................................................ 15

3.3. Opportunities:..................................................................................................................................... 15

3.4. Threats................................................................................................................................................ 15

V. INTRINSIC VALUE. ......................................................................................................... 15


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1. Input data:............................................................................................................................................ 15

1.1 Growth caculation .............................................................................................................................. 15

1.2 Risk adjusted discount rate calculation: ............................................................................................ 16

2. Intrinsic value calculation:................................................................................................................... 16


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I. Background.Google Inc. is a multinational public cloud computing, Internet search, and

advertising technologies corporation. Google began in January 1996 as a research project

by Larry Page and Sergey Brin when they were both PhD students at Stanford Universityin California. It was first incorporated as a privately held company on September 4, 1998,

with its initial public offering to follow on August 19, 2004. The company is now listed

on the NASDAQ Stock Exchange under the ticker symbol GOOG and under the

Frankfurt Stock Exchange under the ticker symbol GGQ1. The company's stated mission

from the outset was "to organize the world's information and make it universally

accessible and useful", and the company's unofficial slogancoined by Google engineer

Paul Buchheit is Don't be evil. In 2006, the company moved to their current

headquarters in Mountain View, California.

Google runs over one million servers in data centers around the world, and processes

over one billion search requestsand twenty petabytes of user-generated data every day.

Google's rapid growth since its incorporation has triggered a chain of products,

acquisitions and partnerships beyond the company's core search engines. The company

offers online productivity software, such as its Gmail e-mail software, and social

networking tools, including Orkut and, more recently, Google Buzz. Google's products

extend to the desktop as well, with applications such as the web browser Google Chrome,

the Picasa photo organization and editing software, and the Google Talk instant

messaging application. More notably, Google leads the development of the Android

mobile phone operating system, used on a number of HTC phones such as the Nexus One

and Droid Eris. Because of its popularity and numerous products, Alexa lists Google as

the Internet's most visited website.Google is also Fortune Magazine's fourth best place to

work, and BrandZ's most powerful brand in the world. The dominant market position of

Google's services has led to criticism of the company over issues including privacy,

copyright, and censorship.


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II. Economic Analysis.First, in first quarter in 2010, on May 27, the United States GDP growth for the first

quarter of 2010 was revised down to 3%, showing that the recovery in the biggest economy

in the world may not be as strong as many have expected.

Figure 1: GDP Growth rate.

According to The Conference Board Leading Economic Index, leading indicators during

the six-month span through April, the leading economic index increased 4.4 percent,

coincident indicator during the six-month period through April; the coincident economic

index increased 1.1 percent; the lagging economic index increased 0.1 percent in March and

increased 0.2 percent in February. All indicators do show that US economy is in recovering

period. Growth in US economy will affect so much to Google revenue. Recovering of US

economy make new and existing companies more and more using online Ads (Google

revenue gets almost revenue from online advertising services) to expand operation. Google

has positive relationship to market index (S&P) , thus growth in US economy is motivation

for all part of US economy include Google corporation.

Additionally, growing in US economy make potential growth for online advertising

industry , this was showed in prediction of Emarketer:


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Figure 2: US search Advertising

Figure 3: Googles historical price

We use S&P 500 index to represent for market index, we can see trend of Google

stock is quite same as S&P 500. Moreover, Beta of Google to market index is 1.07 that means

Google revenue has much correlation to market economy.This dependence of Google growth to economy growth was also showed by financial

crisis in 2008. Although google still got profit in difficult sistuation, growth not high

compared with 2009(54%) , 2008 (0.5%), and 2007(36%) . (2009:6,520.45; 2008: 4,226.86 ;

2007:4,203.72 ; 2006:3,077.45)( in thousands) . By these data, we can see financial crisis

2008 have reduced so much in growth of Google.

Moreover, in March 2010 Google is facing to leave China market because of

conliction beetwen Google and Chinese government. Thus, its possible that Google will lose

this potential market . However, this can be not affected much to growth of Google, because


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loyal chinese customers still use Google search engine as main search tool in HongKong

domain supplied by Google in Hong Kong.

Although all indicators of US economy give the same good signs for the US

economy, US and global economy still in recovery period. Moreover, n fact, consumerspending, which is vital in elevating production levels is weak mostly due to high

unemployment rate. And although we can see some improvement in the labor market it may

take a few years to revive 8.5 million jobs lost since the recession began in December 2007.

In fact, in 2010 the deficit is likely to reach 10.6% of GDP and the Obama administration is

projecting that national debt will rise from 64% of national output to 77% by 2020. Thus, US

economic recovery will be challenged in the months ahead.

III. Industry analysis.1. BackgroundInternet information provider Industry

The Internet Information Provider industry is populated by customer facing firms

that generate their sales primarily through families of Internet sites. These companies

specialize in creating and / or aggregating content and then attracting eye-balls to their site

through the generally free provision of such content. At their core, all such sites, disregarding

the smaller niche players, are effectively margin machines relying on advertising: they spend

money on enhancing their websites and improving their content offerings while marketing to

attract viewers but they resell the eyeballs they attract to advertisers for more than the internal

costs for capturing those eyeballs. Overall, this industry excludes e-commerce firms (such as

eBay and Amazon) as well as Internet software providers or firms that otherwise are

generally firm rather than consumer facing. Companies that are part of this industry have

mass consumer focused Web sites that supply neutral information.

.

Table 1: Industry Statistics.(Source: http://biz.yahoo.com/ic/851.html)


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Figure 4: Revenue Growth

(Sources:

http://ycharts.com/industries/Internet%20Information%20Providers/charts/revenue_growth)

Growth in Internet information provider industry was very rapid through the late 80s

and the 90s.The revenue growth at this time more than 160% at the first quarter of 2000,

it slightly decrease over 2 year 2001 and 2002 and keep the average growth about 35% to

40% from 2002 to 2007.In 2008 as many industry internet information provider also be

affected by the world crisis, the revenue growth strongly decrease at that time (equal -

3.04% at quarter 4 2008).But in recovery year 2009 Internet information provider

industry confirm that it is a very potential industry with the revenue growth increase to

46.6% at quarter 2 2009.

4. Industry life cyclesThrough 2009 and 2010 the internet information provider industry has average growth

about 40%to 46% .Now two main companies Google and Yahoo see that category and

geographic expansion will drive revenues, so existing product will likely move into fast

growing market like China and Indian, as well as Central and Eastern Europe and Latin

America. Long-term, however, the industry may face more fundamental challenge.

5. Porters five forces:5.1.Bargaining power of Suppliers:Threat of forward integration Google search may not perform as well with new software

releases from Microsoft and Apple. Competition elimination and substitution: Microsoft

embedding their search tool into their Explorer browser.

5.2.Potential entry of New Competitor:

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At American market, searching tool and online advertising industry are dominated by

few competitors like Google, Yahoo Search, MSN Search and Ask.com. As the result, a

large industry dominated by a few high volume competitors is going to be harder for a

new entrant to enter industry for small and medium competitors. In addition, capitalrequirement is also difficult barrier to enter the industry.The more start-up capital that is

required the less likely additional competitors will enter the market. As we know, to

advertising a new search tool like Bing,Microsoft spent more than 100 million dollars.

The reason prevent the new competitors entering the market is proprietary product

differences. Yahoo & Microsoft have radically improved their search engines and can on

pass/deploy their search tool through their products. On the other hand, these dominants

own strong branches that customer prefer to use.

5.3.Rivalry among Competing Firms:Currently, although there are only a few rivals (Microsoft, Yahoo) in searching tool

and online advertising industry market, Microsoft as well as Yahoo is not satisfied with

their market share position. As a result, the risk of competitor rivalry is high. Finally,

because of high proportion of the total costs in fixed cost like advertising cost in case of

Bing in Microsoft, then each competitor will need to maintain volume, which can drive

high competitor rivalry. Brand identity is important (if not paramountGoogle has made

the word as a noun and a verb)

5.4.Threats of Substitutes:The degree of threats of substitutes is high because of negligible switching cost. Products

and services are different in speed and accuracy, so customers are more likely to change

the products they use.

The threats of substitutes depend on loyalty of customers. In order to remain customers,

the company has to improve complexity or sophistication with the search tool.

5.5.Bargaining power of Buyers:It seems to be that the customers have more power in this industry because of

negligible switching cost and there is no different between searching engines of them. But

in fact, few competitor and large customers in industry lead to reducing the bargaining of

customers. In addition, costs of switching to substitute method in another industry are

high. Cost of advertising on TV or newspaper is more expensive than online advertising,

therefore businesses cut down or completely abandons the press, and TV, but they'll never

give up on SEO, contextual or banner ads. As a result, the power of buyer is decrease.


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IV. Company analysis.1. Screening ratio.Ratio Results

MV per share to BV per share 4.035999335

BV per share to MV per share 0.24777011

Cash per share (Total cash/# shares out) 28.86118873

Net-net per share (CA - TL/# shares out) 83.34327608

Tobins Q = (stock price x # of shares)/(TA - Intangibles) 3.674127765

Table 3: Screening ratios of Google.

Googles market value is 4 times its book value. This would indicate that Google

might be overvalued.

Book value to market value of Google is very low which would indicate that Google

is not a Value stock

Net-net per share (83.3) is smaller than market price of share => the share is

overvalued

The Tobins Q which is greater than 1 is another indicator illustrate Google is maybe

overvalued

Therefore, all of the above indicators suggest that Google stock might be overvalued

2. Financial statement analysis.2.1.Current financial situation.

Googles major industry is Internet Information Provider, one of the newest industries

in the world. Google's market share in the US was 72.11% in February 2010; Yahoo Search,

MSN Search, and Ask.com received 17.04%, 5.56% and 3.74%, respectively. Thus, our

group chose Yahoo as the representative for the whole industry to compare with Google.


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Google 2002 2003 2004 2005 2006 2007 2008 2009

Sales439,508 1,465,934 3,189,223 6,138,560 10,604,917 16,593,986 21,795,550 23,650,563

NI99,656 105,648 399,119 1,465,397 3,077,446 4,203,720 4,226,858 6,520,448

profit

margin22.67% 7.21% 12.51% 23.87% 29.02% 25.33% 19.39% 27.57%

Table 5: Profit margin

Figure 5: Googles Sales and Net income.

- The average growth in revenue of Google in the 5 year period, from 2005 to 2009, is

about 52.31%.

- At the beginning of 2004, when reaching a peak, Google dealt with over 80% the

amount of searching in the Internet, so their revenue growth exceeded 117% in 2004.

- Due to the competition of rivalry such as Yahoo, Microsoft, and Apple, the revenue

growth rate of the Google declined dramatically in 2008 and 2009, from 56.5% in

2007 to 31.35% and 8.51% in 2008 and 2009 respectively.

- The decrease in revenue is partly caused by the financial crisis. Many companies

should economize on expenditure for advertising. Therefore, the revenue from

advertising activities of Google is declined.

- Although the revenue decreased from 2005 to 2009, net profit margin was quite stable

around 25%. This might be explained that Google managed expenses well over the

last 5 year.

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2002 2003 2004 2005 2006 2007 2008 2009

Google

sales

NI


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- In 2009, Net profit margin of Google (27.57%) was higher than the market (22.6%).

2.2.2 ROA(in thousands dollar)

Google 2005 2006 2007 2008 2009

Total assets 10,271,813 18,473,351 25,335,806 31,767,575 40,496,778

NI 1,465,397 3,077,446 4,203,720 4,226,858 6,520,448

ROA 14.27% 16.66% 16.59% 13.31% 16.10%

Table 6: ROA

Apart from 2008, the global recession, the ROA of Google was quite stable around

16% from 2006 to 2009. The meaning from this ROA is that Google managed well the

growth of net income in order to equal with the growth rate of total assets. In 2008, althoughthe ROA was less than in 2007, net income in 2008 was slightly greater than 2007.

2009 Google Yahoo

ROA 16.10% 4.00%

Table 7: Compared ROA

In 2009, Googles ROA was 4 times as much as the Yahoos ROA. So Google assure that

with any amount of assets they managed, they can generate more income for the whole

corporation.

2.2.3 ROEGoogle 2005 2006 2007 2008 2009

Total equity 9,418,957 17,039,840 22,689,679 28,238,862 36,004,224

NI 1,465,397 3,077,446 4,203,720 4,226,858 6,520,448

ROE 15.56% 18.06% 18.53% 14.97% 18.11%

2009 Google Yahoo Industry

ROE 18.11% 4.79% 14.70%

Table 8: ROE

ROE of Google was also kept stably around 18% in 2006, 2007, and 2009. In 2008,

due to the economic crisis, the net income of Google was equivalent to net income in 2007.

But, total equity of Google increased in 2008. Consequently, the ROE decreased in 2008.

After a rough business year, immediately, Google recover the growth in sales and net income.

Moreover, the ROE of Google is higher than the industry and 4 times as much as Yahoos

ROE. Google can bring more benefit to investors.


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Through three ratio of profitability including profit margin, ROA, and ROE, we can

conclude that the management and current business activities of Google are admirable. They

overcome the global crisis quickly.

2.3.Liquidity analysis.

Google

2007 2008 2009

Current

ratio8.49 8.77 10.62

Quick ratio 8.15 8.16 10.31

Table 9: Liquidity ratios.

At present, Google is able to pay off its obligations if they came due, because currentratio and quick ratio raised significantly from 8 to 10. This is a good sign to prove that

Google is in good financial health. Current ratio also gives a sense of the efficiency of

Googles operating cycle.

2.4.Leverage ratios.Google

2007 2008 2009

Debt ratio 0.07 0.11 0.11

Debt/Equity

ratio0.12 0.12 0.12

Table 10: Leverage ratios.

Debt ratio and Debt/Equity ratio are very low. Google used small amount of debt to

finance increased operations. This cannot result in volatile earnings due to the additional

interest expense. Thus, the risk from debt financing of Google is kept in nearly perfect

situation and shareholders can get more benefit.

3. SWOT Analysis3.1.Strengths: Google is leading search engine all over the world.

Google has well-known brand name.

Google offer useful information effectively and fast

Google does not confuse its users with favorable interface.

Managers of Google are PhDs.

Google is a dominant firm.


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3.2.Weaknesses: Google is the target that many spammers aim at to ruin the ranking technology by

creating dummy sites with thousands of links to pages.

The advertising charging policy creates confusion to the marketers to predict howmuch they would cost.

Contextual search algorithms are not 100% perfect and make mistakes many times.

Google stopped providing search engine in mainland China, so they will lose huge

market share and revenue from the largest Internet market.

3.3.Opportunities: Google can become a mass-market portal like Yahoo and MSN and can increase

switching cost for its users. Google can enhance personalized and localized searching and can also add localized

paid listings of advertisers.

Google can start giving fully fledged services on hand held mobile devices to capture

market beyond conventional internet.

Google can compete intensely with their major competitors by cooperating with other

corporation (HTC) and acquiring Youtube, DoubleClick, and Writely.

3.4.Threats

Many competitors can emerge in coming years with same services, better interface

and names and can catch up Googles market.

Googles charging policy could disappoint its advertisers and Google would start

losing many of them.

Google can get trapped in issues regarding privacy if it decides to go for highly

personalized search for which it has to capture users personal information.

Google may violate Berne convention if they digitalize many books all over the

world.

Google may face with the decline in revenue after they stop providing search engine

in China.

V. Intrinsic Value.1. Input data:

1.1Growth caculation


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Growth g= b*ROE, where

b= 1payout ratio

And payout ratio = 0

b = 10 = 1

5 year average ROE = 17.046%

Year ROE (%)

2005 15.56

2006 18.06

2007 18.53

2008 14.97

2009 18.11Average 17.046

Table 11: Average ROE

So: g = 1*17.046% = 17.046%

1.2Risk adjusted discount rate calculation: CAPM:

- Using our beta calculation:

K = 0.0016 + 1.108*0.084 = 9.4672%

- Using Yahoo Finances beta calculation

K = 0.0016 + 1.07*0.084 = 9.148%

Constant growth model:

K = Future growth rate + Dividend yield

= 17.046%

2. Intrinsic value calculation:

Estimation of future revenue, net profit, EPS and dividend in next 3 years, and price in

year 3

Current Yr Year 1 Year 2 Year 3

Revenue in

millions 23650.563 27682.04 32400.72 37923.745

Net Profit (mill.) 6520.448 7834.017 9169.403 10732.42

EPS $ 21.97 24.59737 28.79024 33.697823

Div 0 0 0

Price 525.35

Table 12: future price


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Where:

Revenue in year 1= Revenue in current year*future growth rate

Net profit = Profit margin* Revenue (Profit margin = 28.3%) EPS = Net profit/ # shares ( # of shares = 318.49 mil)

Dividend = EPS*Payout ratio (Payout ratio = 0%)

Price in year 3 = future P/E * EPS (future P/E = 15.59)

Dividend discount model: using dividend discount model to estimate intrinsic value

Formula:

Po =1

1+ +D2

1+k2 +D3

(1+)3 +P3

(1+)3

Results:

CAPM Intrinsic Value 400.49

Constant growth Intrinsic Value 327.63

Compared to current price, it is concluded that the price of Google might be

overvalued now.

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Fundamental Analysis Group iStock Google Final