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First ever DCF on GOOG. Need some Advice and Criticism on my thought processes when forecasting. : stocks

by /u/Hanzoisbad
December 18, 2022
in Stock Market
Reading Time: 5 mins read
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Spreadsheet: https://imgur.com/a/TLkzWt8Revenue forecasting: https://imgur.com/a/jHtuSgp

Revenue:

Revenue mainly comes from Advertising, Cloud and Others and can be reliably forecasted. For simplicity sake, the first paragraph of each year will be %of revenue from Advertising, Cloud and Others. Second paragraph of each year will be Y/Y growth from Advertising, Cloud and Others.

Cloud:
2022:
% forecast: Due to covid, businesses were pushed to go digital so firms are more receptive to automation so Cloud is likely to take up a larger portion of revenue over time.

Y/Y forecast: The average of 2020 – 2021 is taken when forecasting Y/Y cloud 2022 as these took into account the effects of covid, however a limitation recognised here would be that in 2022 high inflation led to high interest rates so Y/Y growth may not be so high.

2023 – 2024:
% forecast: I forecast that cloud will start taking up a larger percentage of revenue as the Fed do expect interest rates to come down by end of 2024 when interest rates fall businesses are likely to be able to invest in the business and automate.

Y/Y forecast: Due to a lack of industry knowledge I’m going to be conservative and assume a slightly higher than historic growth rate of 2% Y/Y per year from 2023 to 2024.

2025 – 2026:% forecast: I estimate cloud will probably peak at about 15% due to tougher competitions from AWS and market saturation.

Y/Y forecast: Due to the full effects of falling interest rates finally showing up due to the lag in policy in 2025, Y/Y increase is going to spike higher than past forecasted years.

2027 – 2030:% forecast: I estimate that cloud will probably plateau at about 13.5% onwards.

Y/Y forecast: Revenue is plateaued to 47% as a conservative estimate

Advertising:

2022:% forecast: Advertising is going to decrease in terms of % of revenue due to decrease in retail spending and tougher inflation environment.

Y/Y forecast: To prevent Y/Y growth from being skewed by 2020 Covid, I only took the average of 2018-2019 where advertisers had the confidence of spending on advertisement without taking covid into consideration.

2023 – 2025:% forecast: Advertising is going to decrease in 2023 and 2024 due to high interest rates and uncertain environment for investors. A conservative 1% was used in decline as advertising is still GOOG’s core operations.

Y/Y forecast: Y/Y growth is assumed to be more conservative as advertising is a matured business of GOOG. But 2025 Y/Y growth will be higher due to lower interest rates.

2026 – 2030:% forecast: GOOG is likely to continue being a strong seller of advertisements and their expansion into different modal for google searches is likely to keep their advertisement revenue high.Y/Y forecast: Y/Y growth is harder to forecast due to uncertainty in interest rates policy from 2025 onwards.Others:% forecast: I’m uncertain of how exactly to accurately depict others but it is not something that GOOG focuses on especially when you listen to their past few earnings calls. So % I’ll just use others to top up till 100%

Y/Y forecast: Y/Y growth I’ll assume plateaus at about 18% due to strong competition from Apple.

EBIT:

The average of 2020 and 2021 were taken when forecasting 2022 as 2020 was when there were high layoffs due to covid uncertainty and 2021 was when there was low interest rates that allowed companies to reinvest more than usual.

GOOG is still reinvesting large sums back into cloud so EBIT is taken to decrease till 23% with reference to 2018 and 2019 where it seemed like a steady margin and the most efficiently run GOOG was.To be conservative I’ll just assume EBIT goes to 20% by the end of my forecast period.

Taxes:

Due to GOOG being high in R&D I’d assume Taxes hold steady at 20% throughout my forecast.

D&A:

Assumed to be at 7% throughout

Deferred Taxes:

Being a relatively small line item, I assume that deferred taxes are going to get smaller as GOOG would probably know how to value their PP&E properly as more time goes on. But since it is a small line item, I just put it at a constant 1% to avoid over or undercompensating for it,

Change in NWC:

Assumed to be at 1% throughout

CapEX:

I assume GOOG is going to ramp up CapEX going into 2025 due to interest rates expected to be lowered by then. But over time as Cloud becomes matured I don’t see CapEX taking up a large portion so I tend it towards 10% just above D&A

WACC:

COE, GOOG does not pay dividend yield so most of COE comes from average % price increase in its stock.I’d assume GOOG has a market beta of the average between 1.25 and 1.06 based on https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html GOOG is classified under information services? And https://finance.yahoo.com/quote/GOOG/Risk free rate at the time of 2021 was about 2%.

Risk premium was 5.5% based on https://www.statista.com/statistics/664840/average-market-risk-premium-usa/

COE = 8.35%

COD, GOOG’s bond yield was taken into consideration for this.

https://cbonds.com/bonds/55087/#:~:text=International%20bonds%3A%20Google%2C%203.625%25%2019may2021%2C%20USD%20(US38259PAB85)

COD = 3.625%

%Equity = 100% – 30.37% = 69.62%%Liability = 97072/319 616 = 30.37%Tax Rate = 19% based on 2021’s Taxes

📷

Extract from GOOG’s 2021 10-K

Total WACC = 69.62% x 8.35% + 30.37% x 3.625% x (1 – 19%) = 6.71%

TGR = 2.5%

some very specific questions I have:

  1. Is my Tax forecast by holding it at 20% unrealistic?

  2. Is it okay to keep depreciation constant at 7% of sales?

  3. Unsure of how exactly to accurately depict change in NWC?

  4. Was there a better way of finding out WACC for GOOG?



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Tags: adviceCriticismDCFforecastingGOOGProcessesstocksThought
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