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QuestionsCategory: Valuation QuadrantAlphabet valuation (again…)
Benjamin Sing asked 3 months ago

Sorry, I see a few posts on this, but I don’t see my question asked!
 
So while plotting historical P/E of Alphabet, as per the video, I realised in 2017 the provision for taxes was abnormally high, and the 10-k cited Dec 2017 tax law changes as the reason. So may I ask if I can omit the 2017 value and use the average of 2016 and 2018 instead, then I decided to give it a 20% haircut to be conservative. This flattens out the standard deviation somewhat (using acutal values, its ~ 17 and with the modification it is ~9).
 
I also valued it by P/CF.
 
Overall by both valuation methods, I feel that Alphabet is currently undervalued, with margin of safety of 19% from average P/CF (2,763) and 38% from average P/E (3,610). Is that roughly what IQ is getting also?
Current price 2234 on 4 Jul.

1 Answers
Victor Chng answered 3 months ago

Hi Benjamin,
 
I adjusted the tax figure to get a rough estimated EPS for 2017 to plot a proper chart. I looked back at the average tax percentage of the previous year to assess the possible tax in 2017. Alternatively, you can do the method that you had just mentioned. 
 
 
I use PE to calculate the intrinsic value of Alphabet; my MOS is about 35% which is close to your 38%. 
 
Good job, and keep it up :)

Benjamin Sing replied 3 months ago

Thanks Victor for the reply. Using tax percentage seems to be a good way too!
I also found using the cash flow as a good surrogate, although estimate of margin of safety is different (naturally due to different denominator).

Victor Chng replied 3 months ago

Welcome :)