**NOTE NOT FINANCIAL ADVICE**
# Introduction:
GOOG has a very simplistic goal in their business, yet this simple goal managed to carry GOOG’s market cap to a trillion dollar. GOOG’s main business model is centered around helping consumers sieve through large chunks of data to find what they need or want to find. Recently, with the announcement of Gemini, GOOG’s GenAI, it led to a temporary spike in stock prices as investors believed that Gemini would be able to compete with ChatGPT. I believe that the advancement of GenAI is necessary for GOOG given how reliant they are on Search revenue.
# Revenue:
The success of GOOG’s advertising is hinged on 2 criteria, being able to attract and retain users and being able to monetize advertisers.
***For attracting and retaining users,***
1. GOOG released Gemini their generative AI to help complement Search. This allows users to process information faster or seek answers more efficiently.
2. GOOG has entered into a deal with AAPL to make Google the default search engine on Safari. This deal is estimated to be worth about 18 billion per year.
3. There is a large switching cost for long-term users to switch over to a rival search engine. This is so because using the Google search engine means that there is a high chance users will be indoctrinated into the GOOG ecosystem (E.g. Gmail, Google Drive, etc.).
***For monetizing advertisers,***
1. GOOG is one of the largest platforms that advertisers can advertise on. The type of information that users receive is dependent on GOOG, GOOG controls the information flow to consumers and hence is a powerful platform for advertisers to advertise on.
Apart from these factors, GOOG has begun targeting SMBs (Small and Midsize Businesses).
How GOOG sees SMBs (Small, Medium Businesses) advertising with them is that GOOG will provide Gen AI to generate images/captions for their ad campaign then SMBs use these advertising materials and advertise on Search.
When forecasting advertising revenue, opting for less granularity, and due to a lack of public data, I lumped both search and YouTube together. Taking the number of YouTube users as a proxy for the popularity of GOOG’s advertising tools.
So, I assumed that it would take 1 year for GOOG to finish and get Gemini up to speed. I assumed that it takes about 2 years for consumers to get used to Gemini and for advertisers to notice this shift. This quick adaptation is because ChatGPT took off very quickly within the year it was released.
When forecasting revenue/users, due to the macro constraints and pessimism advertisers are cautious about advertising so the revenue/users have been dropping for the past 2 years. I assume it takes 2 years for the macro outlook to improve and during the high growth period, revenue/users grow as well as more advertisers start spending more.
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When forecasting Google Subscriptions + Others, which entails YouTube premium, GOOG devices, and Google Play revenue. I assumed that the success of this category is based on YouTube Premium so I forecasted this revenue segment based on the number of subscribers to YouTube Premium. Number of Subscribers in 2022 ([SOURCE](https://www.billboard.com/business/streaming/youtube-music-premium-subscribers-how-many-1235594920/#:~:text=That’s%20up%20from%20the%2080,at%20the%20end%20of%202021)). Comparing Youtube Music to its strongest competitor Spotify, Spotify has a large switching cost due to years worth of playlists built that would be lost by switching over. On top of that, having to learn the new UI of YouTube Music and the lack of certain features that Spotify users are used to.So, the main driver for this segment would be YouTube Premium, given the indispensable nature of YouTube due to the strong network effect and new frontiers such as YouTube Shorts that are driving people to YouTube, and the longer unskippable ads, all these factors are driving people to subscribe to YouTube Premium. However, I’m cautious about how much or how fast YouTube Premium will grow. Due to strong competitors such as TikTok and Spotify, I’d assume the historic large growth will taper downwards as the high historic growth was due to the low-hanging fruits being picked.
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When forecasting Revenue/Users, as GOOG wants to keep their prices low to attract users to YouTube Premium, historically the revenue/users have been declining. However, as recently as July 2023 GOOG started hiking prices. So, I’d assume that in my forecast from FY24 onwards, the Revenue/Users begin rising. Historic price hikes have been at around 16%, I’d assume that GOOG no longer pursues such aggressive price rises and begins tapering down their price increases. Their perpetual Revenue/users growing in line with the perpetual inflation rate.
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When forecasting Google Cloud revenue, since there isn’t available relevant data to create a bottoms-up revenue model I forecasted it as Y/Y growth. Taking into account ([SOURCE](https://www.grandviewresearch.com/industry-analysis/cloud-computing-industry)). Given that GOOG mainly offers IAAS and SAAS for cloud computing, as businesses begin ramping up their digital efforts in line with the global push towards digitalization there is an increasing demand for IAAS and SAAS cloud computing, especially for IAAS which is stated to have the highest growth rate. I assumed that GOOG’s cloud revenue grew at a Y/Y CAGR of 19.3%.
# Cost:
When forecasting COGS, TAC accounted for about 40% of COGS as per 2023 10-K. I assumed that TAC would tend slightly upwards due to the competition for traffic increasing from competitors such as TikTok.
When forecasting R&D and marketing, opting for less granularity I forecasted it as a % of historic averages.
When forecasting G&A, management has stated that there is a potential usage of AI to reduce the need for labor. I’d assume that G&A tends downward slightly.
# WACC:
RFR (1M Avg) = 4.14%
Beta ([SOURCE](https://finance.yahoo.com/quote/GOOG/)) = 1.06
Stable market ERP ([SOURCE](https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html)) = 4.60%
COE = 9.02%
GOOG has a bond rating of AA ([SOURCE](https://www.moodys.com/credit-ratings/Google-Inc-credit-rating-820429365?lang=es-ar&cy=arg#:~:text=Moody’s%20assigns%20Aa2%20rating%20to%20Google’s%20senior%20unsecured%20debt))
AA bond yield (1M Avg) = 4.80%
Marginal Tax rate = 21.00%
AT-COD = 3.79%
Stock price (5D Avg) = $147.05
Shares O/S = 12433M
Market Value of Equity = 1828272.65M
Weighted Average Debt = 10 Years
FY23 Interest Expense = 308M
Market Value of Debt = 12769.72M
%Debt = 0.007%
%Equity = 99.003%
WACC = 8.93%
#
Conclusion:
Ultimately, in my base case, I value GOOG at $143.16 per share. I believe that GOOG is a company with strong growth potential. However, given that GOOG is a household name and especially with the recent hype when they announced gemini it has led to a lot of enthusiasm and bullish outlook that caused their prices to temporarily spike upwards.
Base Case: \[[INSERT](https://imgur.com/a/N5sTEUE)\]
Best Case: \[[INSERT](https://imgur.com/a/H6Nwjmt)\]
Worst Case: \[[INSERT](https://imgur.com/a/9MQJ5r5)\]
Revenue Model: \[[INSERT](https://imgur.com/a/f1BVoRa)\]
Cost Model: \[[INSERT](https://imgur.com/a/q9kjjCf)\]
Sanity Check: \[[INSERT](https://imgur.com/a/tmtlB4d)\]
Change in NWC Schedule: \[[INSERT](https://imgur.com/a/TcRANOP)\]
