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QuestionsCategory: Valuation QuadrantCalculation of Intrinsic value using cash flow – Alphabet
redvolver asked 3 months ago

Hi all, currently trying to evaluate Alphabet using cashflow instead. Do refer to my 3 screenshot files. The problem is that the IV derived from using diluted EPS vs OCF per share differs way too much.
I am pretty sure that the OCF per share is something alphabet is capable of maintaining, hence I am using that to do my IV calculation
Can I check where do I go wrong with IV using the P/CF?

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Victor Chng replied 3 months ago

Hi Redvolver,

Can you send the excel file to victor@fifthperson.com. I will get back to you once I look through it.

redvolver replied 3 months ago

Just sent over. Thank you!

Victor Chng replied 3 months ago

Hi Redvolver,

There is a mistake in your excel.

Your average PCFO of 34.7x is incorrect as the formula in the cell is based on your PE cell (AVERAGE(E758:E2015) instead of the cash flow cell.

If you correct the formula your PCFO average should be 21.5x. Hence, the IV should be $1865.7 (86.8 x 21.5).

Hope this helps :)

redvolver replied 3 months ago

Ah my bad. Have corrected my formula.

3 more questions here that I will need some advice.

1. So to be more conservative, I can take the minimum of the 2 IVs derived from eps and ocf per share right ?

2. I also notice PEG ratio is removed from the modules. Is it no longer accurate or we can actually apply the usual PE, PCF, PB ratio to get the IVs?

3. When do we apply one standard deviation from the average PE or PCF?

Does it depends on each individual ? Some can feel bullish about the stock after their research and may not apply the deviation.

Sometimes if we are too conservative, then we may never hit the target price to enter lol

Victor Chng replied 3 months ago

Hi Redvolver,

1.Since both of their IV is quite close, you can take either of them but you have be consistent with the valuation method. Once you choose PE as valuation then stick with it. Do note valuation is always a rough estimation. The important thing is your margin of safety and understanding of the business.

2.PEG can’t compute the intrinsic value but usually I will use the average PE to compare with the growth of the company.

3. You mean buying at one standard deviation?

redvolver replied 3 months ago

Yes. I mean buying at one standard deviation below our calculated average PE or PCF to be more conservative.

Victor Chng replied 3 months ago

Hi Redvolver,

It really depend on the company because some of them may not hit one standard deviation. If the company have a fast growth, I will usually pay at fair value.

redvolver replied 3 months ago

Np. Thank you Victor!

Victor Chng replied 3 months ago

Welcome Redvolver :)