Stock Analysis on Net

Alphabet Inc. (NASDAQ:GOOG)

Present Value of Free Cash Flow to Equity (FCFE) 

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

Alphabet Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 14.37%
01 FCFE0 68,735
1 FCFE1 84,414 = 68,735 × (1 + 22.81%) 73,811
2 FCFE2 100,983 = 84,414 × (1 + 19.63%) 77,208
3 FCFE3 117,593 = 100,983 × (1 + 16.45%) 78,613
4 FCFE4 133,193 = 117,593 × (1 + 13.27%) 77,858
5 FCFE5 146,624 = 133,193 × (1 + 10.08%) 74,944
5 Terminal value (TV5) 3,770,615 = 146,624 × (1 + 10.08%) ÷ (14.37%10.08%) 1,927,260
Intrinsic value of Alphabet Inc. common stock 2,309,694
 
Intrinsic value of Alphabet Inc. common stock (per share) $185.77
Current share price $142.17

Based on: 10-K (reporting date: 2023-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.53%
Expected rate of return on market portfolio2 E(RM) 13.63%
Systematic risk of Alphabet Inc. common stock βGOOG 1.08
 
Required rate of return on Alphabet Inc. common stock3 rGOOG 14.37%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rGOOG = RF + βGOOG [E(RM) – RF]
= 4.53% + 1.08 [13.63%4.53%]
= 14.37%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Alphabet Inc., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Net income 73,795 59,972 76,033 40,269 34,343
Revenues 307,394 282,836 257,637 182,527 161,857
Total assets 402,392 365,264 359,268 319,616 275,909
Stockholders’ equity 283,379 256,144 251,635 222,544 201,442
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 24.01% 21.20% 29.51% 22.06% 21.22%
Asset turnover3 0.76 0.77 0.72 0.57 0.59
Financial leverage4 1.42 1.43 1.43 1.44 1.37
Averages
Retention rate 1.00
Profit margin 23.60%
Asset turnover 0.68
Financial leverage 1.42
 
FCFE growth rate (g)5 22.81%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 73,795 ÷ 307,394
= 24.01%

3 Asset turnover = Revenues ÷ Total assets
= 307,394 ÷ 402,392
= 0.76

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 402,392 ÷ 283,379
= 1.42

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 23.60% × 0.68 × 1.42
= 22.81%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (1,767,600 × 14.37%68,735) ÷ (1,767,600 + 68,735)
= 10.08%

where:
Equity market value0 = current market value of Alphabet Inc. common stock (US$ in millions)
FCFE0 = the last year Alphabet Inc. free cash flow to equity (US$ in millions)
r = required rate of return on Alphabet Inc. common stock


FCFE growth rate (g) forecast

Alphabet Inc., H-model

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Year Value gt
1 g1 22.81%
2 g2 19.63%
3 g3 16.45%
4 g4 13.27%
5 and thereafter g5 10.08%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 22.81% + (10.08%22.81%) × (2 – 1) ÷ (5 – 1)
= 19.63%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 22.81% + (10.08%22.81%) × (3 – 1) ÷ (5 – 1)
= 16.45%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 22.81% + (10.08%22.81%) × (4 – 1) ÷ (5 – 1)
= 13.27%