Investment Analysis of Google - Essay Example

Investment Analysis of Google The present valuation of the company is at $400Billion making it the 2nd in terms of value of capitalization in the market. This is commendable for a company that has only been around for 15 years having been formed in the year 1998 (Palepu, 45). The current value price of the company is $524.30 but the 1 year target price is $662.17. This will mean a return for any investment done in the company today. To be able to analyze the company appropriately there are several factors that are to be considered. Some of these include the management structure of the company, the financial strength of the company, economic value and the dividend payout by the company. The management of the company consists of some of the best professionals in the field; this is under the management of Larry Page who is not only the Chief Executive Officer but also the founder. This is a guarantee that he has faith in his company and he understands the importance of the products and the services that the company offers. Having built the company from scratch it is expected that he will lead the company to further growth which will have a direct impact on shareholders wealth The company runs the most popular search website in the world and provides advertising technology to clients on a global scale (Koller, 54). It has technology that enables the users to get better information in regards to search results. There is a clear representation of pictures, videos and text that has made it very popular with users. Its programs such as AdSense and Ad words are easy to use and make it possible for clients to post their advertisements, uptake of these products is expected to increase by 23% in this financial year. Google is in the technology industry and success in this industry is dependent on the ability of an organisation to come up with innovative products and services on a regular basis. Google has been active in the research end and as a result has been able to regularly come up with products that suit the needs of the consumers. Google has an experimentation culture and this ensures that the company always produces new products that keep potential competitors at bay. Therefore this makes a good investment due to the fact that it will always have products that will keep consumers interested. The operational strategy adopted by Google has proven effective. It produces products that are user specific and are targeted towards a certain group of people or companies. This ensures that these products are tailor made for them at a low cost that gives the company a competitive advantage over its competitors. The biggest competitor to the company is Yahoo, although there are other smaller firms like Bing. Google has introduced an investment arm that enables it venture into other areas such as software applications that ensure its earnings are protected from future disruptions. Ever since it went public, the company has been posting positive returns, this is a surety to investors that the company is on the right track and cannot face any financial difficulty that can majorly affect their business. The value of the company can be obtained by using the operating free cash flow method. This method determines the operating cash flow that is left after payment of recurrent expenditures. The formula for calculating this is: Operating free cash flow method: Operating Cash flow- capital expenditures Capital expenditures = $2.26 billion Operating cash flow = $3.92 billion Operating free cash flow method: ($3.92-$2.26) = $1.66 billion Google’s Relative Value: this is by use of historical and forward ratios as shown below: Price/earnings ratio This shows how the much money an investor in the common shares pays per dollar of the current earnings of the company (Koller, 21). This figure is 30.87 and is an increase from the previous year, when it was 23.14 Price to book value ratio This is used to show the markets judgment in regards to the relationship between the company’s actual rate of return and its required return date. This figure for Google is 4.57 and is an increase from 3.46. These show that the company is on a positive trend and will make a worthy investment. Investor expectations are that any investment they make today will be able to yield positive returns in future. According to my analysis of the company, the company is profitable and will be able to meet the expectations of the investors. In regards to the company the best strategy would be a protective put strategy (Damodaran, 98). This would greatly reduce the risk of losing money by the investor if the value of the security declines. By purchasing a put option the investor is still able to benefit from future gains in the value price but will not incur any losses should the value drop below the option price. So in this case, at the going rate of $524.30, the value of the value increase to $662.17 then the profit gained would be: (662.17 * 1000) – (524.30 * 1000) = $137,870(Increase in investors value) The bull call spread is a strategy used when it is believed that the price of the asset will go up in future. Google’s value is expected to go up and this appears to be the best action to take. This is done by purchase of two call options, at-the-money option and out-the- money option. An example is where I own 1000 shares of the stock at the cost of $525.20. If the stocks are expected to rise soon we can enter into a call spread by buying JUL $500 call for $100,000 and writing JUL 600 call for $50000. The net investment to put on this spread is $150000. When the stock price of the company starts to rise and the figure at the expiration date is checked. When the price goes beyond the up price then the spread expires and the cost of the spread is debited while we keep the profits. In case of prices below the lower spread these options expire and the cost of the spread is lost. Works cited Palepu, Krishna G, and Paul M. Healy. Business Analysis & Valuation: Using Financial Statements. Mason, OH: Thomson/South-Western, 2008. Print. Koller, Tim, Marc Goedhart, and David Wessels. Valuation: Measuring and Managing the Value of Companies. Hoboken, NJ [u.a.: Wiley, 2005. Print. Damodaran, Aswath. Damodaran on Valuation: Security Analysis for Investment and Corporate Finance. Hoboken, N.J: Wiley, 2013. Internet resource. Read More