Given the recent volatility in the market, I thought it would be a good time to review some of my past valuations and update them.
Below are the meaningful changes I made to the Google model. Updated model here.
1. Updated 2021 Google properties revenue growth from 10% in the original model to 35% (!!!) to reflect YTD numbers. Updated 2021 Google Network revenue growth from 6% to 20%. These are obviously big jumps, but seem justified based on the first two quarters of the year. It’s unclear to me that Google can repeat this level of growth in 2022 and beyond, so I have not changed my revenue growth assumptions going forward. I’m assuming the ongoing pandemic has provided a massive boost to online advertising in general and growth going forward will be slower.
2. Updated 2021 Google Cloud revenue growth from 30% in the original model to 45%. Updated future growth vector as well to be a little more optimistic on the cloud business.
3. Increased EBIT margin from 20% in 2021 and beyond to 25%. This is based on YTD earnings, which show significantly improved margins.
4. Updated global digital ad spending numbers to reflect the latest data. With this update, the model assumes ~43% of all online advertising dollars accrue to Google in 2030. This seems somewhat optimistic given the competition from FB and Amazon, but reasonable given Google’s current market share is just over 50%.
5. Increased the discount rate from 3% to 5% to reflect the increase in inflation expectations.
Based on these updates, I arrive at a per share value of $2740 for the company. This is pretty much right on top of today’s share price.