|
|
During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Forget Adderall. Traders now pop chia seeds to stay focused and energized
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | AUGUST 10, 2004
 SPECIAL REPORT By Scott Kessler Putting a Value on Google, Part 2 [Page 2 of 2] GOING DUTCH. Using discounted cash-flow calculations for a private company requires many assumptions. Because Google's stock has not started trading, we had to estimate its possible beta -- a widely used measure of a stock's volatility. We estimated it at 25% higher than Yahoo's beta, reflecting uncertainties as to the Dutch auction, Google's current non-public shares, its expected limited float, and likely disparities in analyst expectations (reflecting the company's limited operating history and indications it will not provide financial guidance). This beta (2.0) reflects an expected high degree of relative share volatility, and yielded a relatively high discount rate of 17.4%. We project annual free cash flow (FCF) will more than double on average over the next three years, trending down to 44% growth from 2007 to 2011, and to under 10% for the seven years thereafter. Our expected perpetuity growth rate for the years to follow is 3%. Based on these assumptions, we derive a possible intrinsic value of $161 per share. Our sensitivity analysis indicates that changes in inputs such as beta, our initial FCF estimate, and rate of perpetuity growth would have a material impact on our intrinsic value calculation.
Google's SEC filings include some clues as to what the company has determined as a fair value for its stock. Specifically, for the purposes of financial accounting related to stock-based compensation for employees, the company has engaged in valuation analysis not all that dissimilar to what we have done in this report. Google has utilized relative and intrinsic analyses in valuing the stock options it has granted to its workers. NO SURPRISES. In the second quarter of 2004, Google incurred deferred compensation expenses associated with stock options of $74.8 million. The company granted 965.5 million stock options during the quarter. Dividing the deferred compensation by the number of options issued yields $77.43 per share in unearned compensation. Adding to this amount the weighted average strike price of the options of $38.43, results in an implied per-share value of $115.86. In the first quarter, the same analysis indicates Google valued its stock at $91.98, suggesting 26% appreciation from the first quarter to the second. And with our various analyses completed, we set out to arrive at a final valuation for Google's public debut. Taking the average of the possible valuations we calculated using relative analysis, intrinsic analysis, and option analysis results in a potential per-share price for Google of $121 to $127 -- within the indicated price range of $108 to $135 set forth in its July 30 SEC filing. Required Disclosures As of June 30, 2004, SPIAS/SPSI and their U.S. research analysts have recommended 35.9% of issuers with buy ratings, 52.7% with hold ratings and 11.4% with sell ratings. 5-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis. 4-STARS (Accumulate): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis. 2-STARS (Avoid): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain. 1-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis. All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Note: Scott Kessler has not participated in, and will not participate in, the Google IPO process. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com. Other Disclosures This research report from which this article was excerpted was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS") and distributed in the U.S. by Standard & Poor's Securities, Inc. ("SPSI"), a registered broker-dealer, and a member of the New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc. The research and analytical services performed by SPIAS are conducted separately from any other analytical activity of Standard & Poor's. No research analyst that prepares a research report on a subject company has a financial interest in or is associated with that subject company. Disclaimers This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
 Analyst Kessler follows Internet software and services stocks for Standard & Poor's Equity Research Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, Bloomberg L.P.Terms of Use | Privacy Notice |
Printer-Friendly Version
