Buying Alphabet/Google After Reviewing Price Target

During my routine review of the fair value targets for Watch List stocks, I noticed there was a bug in my spreadsheet for the calculation of Google's (GOOG) fair value target. For terminal value, I was discounting by the free cash flow margin rate instead of the discount. This led to a quite substantial under-estimation of the company's worth based on free cash flows.

How substantial? Well, consider that the free cash flow margin target for Google is 28.5%, while the discount rate is MUCH lower, at just 10.25%. The previous fair value target was $127, which frankly had always confused me a bit because most analyst targets are well into the $200's. After fixing the DFCF calculation, my fair value more than doubles to $291 per share.

With the stock trading right around $200, that makes Alphabet/Google stock a pretty attractive buy right now, trading more than 30% under the new fair value assignment. I'm adding it to the Buy List today, and kicking myself for not having added it earlier this year. We would have had a nice gain by now.

As for the qualitative factors, not much has changed since the initial review. Google is still one of a handful of great American tech companies. It has a ridiculous 9 products with over 1 billion users. Its search engine is completely dominant, a verb unto itself. YouTube is the #1 streaming video service (by far). Chrome is the leading web browser on the open web. Android/Google Play are #1 in smartphone ecosystems. The list goes on, simply put, Google is a absolute no brainer for a "green dot" stock.

With this price fix, I've gone back and reviewed ALL of the other Watch List and owned stocks and didn't find any similar fair value bugs. I think we are good!