How will Google’s Alphabet new reporting structure likely to get increased with transparency and can enhance the multiple assigned to earnings? This is what RBC Capital’s Mark Mahaney had to publish. A higher multiple accompanied with unicorn revenue upside brings Google at US$ 1000 valuation/share.
In every Q for three years, core Google has been maintaining an impressive organic revenue growth i.e. 17% to 23% despite of US$ 70 billion + run rate. Segment like YouTube has been showing a faster growth i.e. 40% (US$ 7 billion in ‘15E revenue), Google Play shows US$ 4.0 billion in 15E’ revenue. Final estimates lead us to believe that Core Google enjoys Op Margins nearby 50%.
Rest of the bets comprises Google Fibre, Google Capital, Google Venture investments and Nest along with other multiple divisions. Ofcourse this there is a potential for substantial value creation in development of autonomous vehicles for combating aging. In that case, we see that Google Fibre and Nest are already on with few business models for generating US1 billion as well as revenue streams.
As per Mahaney, rest of the bets segment is putting in a lot of effort to come up with Operating Losses of US$ 3.0 billion to US$ 6.0 billion in this year. These are way too high in levels but are steady in moving along with Google’s long lasting 70-20-10 investment framework. Such high levels suggest significant opportunity for efficient cost/investment management by Google’s new Chief Finance Officer.
A reasonable Sum-of-Parts valuation approach would get applied a range of P/E multiples i.e. 17X – 25X to Alphabet’s 2017E operating EPS (US$ 41 to US$ 52 – as how it expands and grows) + an approximately US$ 7 billion for capturing the Other Bets _ the US$ 90 billion in Net Cash estimated for Google’s Core by year 2016. No wonder, Google is on lead to acquire back shares. The result definitely would yield US$ 1000 or perhaps more. Even then, the price target does not rise from US$ 880 and the rating is not that positive.