Alphabet offers a compelling investment case….
Alphabet Inc. (GOOG), the parent company of Google, remains a cornerstone of the tech industry, dominating search, cloud computing, and artificial intelligence. As investors evaluate whether GOOG is a buy, hold, or sell in today’s market, applying robust valuation techniques like the Buffett and McGrew Valuation Methods provides a disciplined approach to estimating intrinsic value. This article leverages five years of financial data from Alphabet’s quarterly filings to calculate intrinsic value per share, assess valuation status as of June 18, 2025 (the last trading day before the Juneteenth market closure), and incorporates key financial metrics—Return on Equity (ROE) and Return on Net Tangible Equity (ROTE)—to offer a comprehensive view of Alphabet’s investment potential. The results highlight divergent valuation perspectives and strong financial efficiency, critical for informed investment decisions. #Alphabet #GOOG #StockValuation #Investing
Methodology and Data Sources
The Buffett Valuation Method, rooted in Warren Buffett’s discounted cash flow (DCF) approach, and the McGrew Valuation Method, which adjusts growth rates for dynamic companies, were applied using data from Alphabet’s SEC filings. The last closing price of $171.18 on June 18, 2025, was retrieved via DeepSearch from Yahoo Finance, Google Finance, and Stock Analysis, ensuring consistency across sources. ROE and ROTE were calculated using trailing twelve-month (TTM) data ending March 31, 2025. #DeepSearch #DCF #FinancialAnalysis
Free Cash Flow and Shares Outstanding
Alphabet’s Free Cash Flow (FCF) over five years (2020–2024) was aggregated from quarterly data (in billions):
- 2020: $42.9
- 2021: $67.0
- 2022: $60.0
- 2023: $69.5
- 2024: $72.8
The 5-Year FCF Compound Annual Growth Rate (CAGR) is 14.1%, classifying Alphabet as a growth stock, though the 3-Year CAGR (2021–2024) is 2.8% due to a 2022 dip. The average shares outstanding in 2024, from quarterly balance sheet data, is 12.295 billion. #FreeCashFlow #GrowthStock
Last Closing Price
The adjusted closing price of $171.18 on June 18, 2025, was confirmed across Yahoo Finance, Google Finance, and Stock Analysis. This date is used due to the market closure on June 19, 2025 (Juneteenth). #StockPrice #MarketData
ROE and ROTE
Using TTM data ending March 31, 2025:
- Net Income (TTM): $111.0 billion
- Average Shareholders’ Equity: $319.1 billion (average of Q1 2024: $292.8 billion and Q1 2025: $345.3 billion)
- ROE: ($111.0 billion / $319.1 billion) × 100 ≈ 34.79%
- Average Net Tangible Equity: $287.9 billion (after subtracting goodwill and intangibles)
- ROTE: ($111.0 billion / $287.9 billion) × 100 ≈ 38.54%
These metrics, validated by external sources (ROE: 34.55%; ROTE: 36.6%), reflect Alphabet’s strong profitability and efficient use of equity, driven by robust revenue growth (12% YoY in Q1 2025) and AI investments. #ROE #ROTE #FinancialMetrics
Buffett Valuation Method
The Buffett method applies a 5% growth rate for Years 1–10 (due to the 3-Year CAGR of 2.8% ≤ 10%), a 2.5% perpetual growth rate, and an 8% discount rate. Starting with 2024 FCF of $72.8 billion:
- Year 1: $76.4 billion
- Year 10: $118.5 billion
- Terminal Value: $118.5 billion × (1 + 0.025) ÷ (0.08 – 0.025) ≈ $2.21 trillion
Discounting FCFs and terminal value yields a total intrinsic value of $1.649 trillion, or $134.16 per share. With a 25% margin of safety, the price is $100.62. #BuffettValuation #IntrinsicValue
Valuation Status
- Closing Price vs. Intrinsic: ($171.18 / $134.16) – 1 = 27.6%
- Status: Hold (Closing Price within 6% below to 35% above intrinsic value, though nearing the 36% Overvalued threshold). #Hold #StockMarket
McGrew Valuation Method
The McGrew method uses the 5-Year FCF CAGR of 14.1%, declining linearly to 10% by Year 7, then holding at 10% for Years 7–10, with a 2.5% perpetual growth rate and 8% discount rate:
- Year 1: $83.0 billion
- Year 7: $161.3 billion
- Year 10: $214.7 billion
- Terminal Value: $214.7 billion × (1 + 0.025) ÷ (0.08 – 0.025) ≈ $4.00 trillion
Discounted present value totals $2.854 trillion, or $232.05 per share. With a 25% margin of safety, the price is $174.04. #McGrewValuation #TechInvesting
Valuation Status
- Closing Price vs. Intrinsic: ($171.18 / $232.05) – 1 = -26.2%
- Status: Screaming Buy (Closing Price ≥ 25% below intrinsic value). #BuyStock #InvestmentOpportunity
Valuation Results Table
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
|---|---|---|---|---|---|
| GOOG | Buffett Valuation | $134.16 | $100.62 | $171.18 | Hold |
| GOOG | McGrew Valuation | $232.05 | $174.04 | $171.18 | Screaming Buy |
Analysis and Implications
The Buffett method’s conservative 5% growth rate, driven by the low 3-Year CAGR, likely underestimates Alphabet’s potential given its AI and cloud growth. The McGrew method’s 14.1% initial growth rate aligns better with Alphabet’s trajectory, suggesting undervaluation at $171.18. Alphabet’s high ROE (34.79%) and ROTE (38.54%) underscore its ability to generate substantial returns, reinforcing the McGrew method’s bullish outlook. The company’s dominance in search (90%+ market share), expanding cloud business, and AI innovations (e.g., Gemini models) support long-term growth, though regulatory risks (antitrust lawsuits) and competition from OpenAI and Microsoft warrant caution. #Google #AI #CloudComputing
Limitations
- Data: Relied on SEC filings; the 2022 FCF dip skewed the 3-Year CAGR.
- Assumptions: The 8% discount rate and 2.5% perpetual growth rate are standard but may not reflect current market dynamics. The McGrew method’s linear growth decline simplifies future performance.
- Price Date: June 18, 2025, used due to Juneteenth closure.
- ROE/ROTE: Slight ROTE discrepancy (38.54% vs. 36.6%) may stem from averaging methods or intangible adjustments.
- Volatility: FCF fluctuations (e.g., 2020’s pandemic impact) affect CAGR reliability. #FinancialModeling #Risks
Alphabet (GOOG) offers a compelling investment case. The McGrew Valuation’s $232.05 intrinsic value suggests a Screaming Buy at $171.18, highlighting significant upside. The Buffett Valuation’s $134.16 intrinsic value indicates a Hold, reflecting caution. Alphabet’s strong ROE (34.79%) and ROTE (38.54%) confirm its financial efficiency, making it attractive for growth-oriented investors. Balancing its AI-driven potential against regulatory and competitive risks, the McGrew method better captures Alphabet’s trajectory. Investors should conduct due diligence and monitor market developments. #StockAnalysis #ValueInvesting #TechStocks
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