Google free cash flow at new highs, valuation attractive
Looking back, I titled my last quarterly write-up of the Google numbers ‘Still a strong theme stock in today’s lower growth world' and my instinct remains that this is the case.
Certainly the immediate market reaction was a bit mixed and when I last looked the stock had traded down in after hours trading. Looking at the core numbers however it is hard to see why. Paid clicks were at an aggregated 18 month low but…
…when you combine with the costs-per-click where compression continued apace you are left with a net growth (17% plus -2%) of 15% which as a core growth figure is pretty damn reasonable.
Of course there are other variables to think about after all diluted EPS (below) looked not very pretty at all. The clue though is centred on the GAAP and non-GAAP number differences…
…because looking in the appendix of the release the influence of stock-based compensation factors, impairment charges related to Motorola and other discontinued items becomes apparent.
Now we can debate GAAP versus non-GAAP but ultimately cash flow does not lie (or - at least - it is harder to fiddle cashflow statistics than anything else as one of my old Professors used to say). Look at the free cash flow statistics below…at least from my records a new high on this metric:
And this got me thinking about valuation. Because if Google could generate US$14bn in annualised free cash then it would currently be trading on a free cash flow yield (using the EV rather than the market cap due to the large amount of net cash they hold) of just under 4.5%. Which is not a bad statistic at all. For completeness the EV/ebit is around a static x14.9 FY14e on a similar basis. Roll this forward another year and this compresses to sub x13.
Not bad for a 15%+ growth company.
Of course there is lots going on operationally - it is not just the growth of search in multiple aspects of our life. A few quotes from the conference call, for example, should suffice:
We’re just getting started with YouTube and its potential.
Clients have already found that mobile display campaigns drive 15% more conversions than they had previously measured
we are really excited about this week’s Android Lollipop launch. This is our largest release on Android ever with over 5,000 APIs for developers. It adds new features including better notifications, battery life and security and introduces a refreshed, consistent visual style.
Chromecast celebrated its first birthday this past quarter. It’s been a smashing success. Users have hit the cast button more than 400 million times since it launched to enjoy their favorite sports, music, premium movies and TV shows.
I talked about US$525 (either class) as a pick-up level for Google stock before and I reiterate that view here. Below this c. US$475 would conceivably be equivalent to a 5% free cash flow yield. Two interesting levels from a still fascinating company.
Source: www.bigcharts.com
