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QuestionsCategory: Valuation QuadrantCalculation of intrinsic value of Alphabet using PE and PEG ratio

Evening coaches
Please see my attached screenshots from my excel file. I have tried to analyse alphabet on its intrinsic value. Here are some questions I would need clarifications on.
1. I understand that pe may not be a good ratio for a growth company like alphabet. But if I exclude the tax from 2017 as a one off item, can the earnings be then seen as predictable because I do see a gradual rising trend in its earnings.from 2013 to 2020.
2. Is my peg ratio calculated correctly? Because I do not see it hitting a \”buy\” zone (peg <0.5) even during march/april 2020 correction. I am using p/e divided by cagr. Do we have to adjust the peg expectation for great growth companies because of the fact that pe ratios are extremely high ?
3. Assuming i am using earnings as reference, is my formula for intrinsic value using pe correct ? Because the intrinsic value derived seems to be extremely low.
4. I am also trying to use peg ratio to derive intrinsic value. But I cannot seem to find the formula for it. Can it be found anywhere in the modules?

Thank you
Red

Victor Chng answered 2 years ago

Hi Red,

1.Yes you are right that 2017 tax is one off so you have to adjust the figure.

2.I don;t advise you to plot PEG into a growth. It may not be very accurate when looking that way. PEG should be use at the current moment. For instance, the company you are paying have a PE of 20 times and the past 3 years growth is 30% which give you a PEG of 0.67x. On top of that the company trade below their average PE. Hence, with PEG and PE valuation point that the company is undervalued.

3.Google have been consistently growing their EPS through out the years so there is no need for you to take the average EPS. You should use the latest EPS of \$54.92 multiply by their average PE of 33.5x which give you an IV of \$1839.82. The net debt/cash formula addition is best use for Asian companies as most of them usually have large net cash position. As for US companies just use the EPS multiply by average PE.

4.As mentioned in point number 2, you can’t derived IV from PEG. PEG is use as an absolute valuation to compare at the point of purchase.

redvolver replied 2 years ago

Ah thanks Victor for the detailed explanation. Touching on question 2. Can I say peg is calculated using current pe divided by growth rate? But the peg for alphabet does not seem to hit the buy zone of 0.5 even during last year correction

Victor Chng replied 2 years ago

Hi Red,

Yes use the current PE and compare it with the past 3 or 5 years EPS to get a sense of PEG valuation.

Alphabet is a superior business with strong moat. It is hard to get them at PEG of 0.5x. For company like Alphabet, it is ideally to get them at fair value. If you are able to get at close to PEG of 1x, I will be good as the business is always trading at premium to its valuation.

redvolver replied 2 years ago

Thanks again Victor! Have a great weekend

Victor Chng replied 2 years ago

Welcome Red :) Have a great weekend too