GOOG_VALUATION

[AUTHOR NAME] 1
Krause Fund Research
Spring 2015
IT Services`
Recommendation: BUY
Analysts
Adam Ishola
Adam-ishola@uiowa.edu
Adrien Voellinger
Adrien-voellinger@uiowa.edu
Jared Mandel
Jared-mandel@uiowa.edu
Company Overview
Google (NASDAQ: GOOG) is the dominant firm leader in
the search engine and online advertising industry. The
company generates advertising revenues both through paid
advertising on their property websites and cost-per-click
revenues on their network member websites, utilizing their
dynamic, proprietary search software—such as AdSense—to
generate cost-per-click revenue. Google’s operations stem
from the search engine and online advertising industry, but
extend into various multi-billion dollar industries and sub-
industries including, but not limited to: apps, online video
streaming, online music streaming, and telecommunications.
As of 2014, Google currently employs approximately 53,600
full-time employees. Google’s largest search advertising
clients of 2014 included Amazon, Priceline Group, AT&T,
Expedia, and Microsoft Corp., who collectively contributed
to over $450 million worth of Google’s advertising revenues
(4). Google also earns revenues from their product and
services operations, a growing segment of operations, which
constituted 11% of their total revenue structure in 2014 (1).
Stock Performance Highlights
52 week High $599.65
52 week Low $487.56
Beta Value 0.93
Average Daily Volume 1,826,450
Share Highlights
Market Capitalization $364.52 billion
Shares Outstanding 680.2 million
P/E Ratio 25.51
Dividend Yield 0%
Dividend Payout Ratio N/A
Company Performance Highlights
ROE 14.52%
2014 Sales $66 billion
2014 Profit Margin 21.2%
Google, Inc. (NASDAQ: GOOG)
April 17, 2015
Current Price $535.53
Target Price $671-$701
Positive Outlook for Google
 Over recent years, Google has stabilized its position in its
industry’s “multi-screen environment” by both increasing its
international operations in developed and emerging markets and
heavily investing in research and development. As the number of
global internet users increases, Google’s international operations
looks promising.
 We believe that Google will not be able to sustain the
exceptionally high YoY growth that it has experienced in recent
years, but we are confident that their cash-based investments and
expenditures in research and development will add to Google’s
shareholder value in the coming year, making them highly
desirable.
 We see revenue growth being driven by pricing
improvements in the mobile area and increased traction across a
variety of platforms, most notably YouTube, reflecting a more
diverse revenue stream.
One Year Stock Performance

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Real GDP
The technology sector is extremely sensitive to the
general state of the economy; there is a strong correlation
between the performance of the technology sector and
GDP.i
Hence, paying particular attention to this figure
may provide predictive value as to the future of the
sector.
Looking into the latter half of 2015, we believe GDP
growth will reach levels near 2.8% for each of the
remaining quarters. Low oil prices paired with
decreasing unemployment rates will boost consumer
confidence which will increase consumer spending.
With added disposable income and consumer spending
comprising over 2/3rd
of GDPii
, we believe the economy
will continue expanding, as we enter the 7th
year of
expansion this summer. With the predicted increase in
business from confident consumers, companies can
increase discretionary investments into IT services to
ensure their future infrastructures are adequately
prepared to adapt to the constantly evolving business
environment. However, we believe growth will slightly
taper off at the conclusion of the year due to stabilizing
oil prices. We speculate that GDP growth will remain
constant, rising at an annual rate of 3.2% in both 2016
and 2017.
Fixed Investments
Fixed investments, a key component of GDP notes the
IT expenditures made by enterprises. Businesses are
major consumers of technology; as a result, there is a
correlation between the amount of funds companies
invest into tech related services and products and the
relative performance of the technology sector.
Furthermore, the fixed investments data may be
disaggregated into several parts: computers and
peripheral equipment, communication equipment,
medical and instruments, etc. Developing expectations
on future enterprise spending in IT is essential to
understanding where the technology sector is heading.
Since the IT sector is comprised in large part of many
patents, spending on intellectual property is highly
important.
We expect expenditures on intellectual property
products by business enterprises to grow at 3.5% during
2015. For the following two years, we anticipate that
intellectual property will grow at a robust 4.7% rate. A
major stream of business for intellectual property is the
financial sector. Financial institutions spend a
considerate amount on their technological capabilities.
Currently, the financial sector is underperforming but we
anticipate that it will make a recovery in 2016. However,
we anticipate that private spending by companies in
other sectors cam help mitigate the effects of reduced
investments in IT by the financial sector during the first
quarter of 2015. Fixed investments in intellectual
property will grow by 4.7% annually, for the years 2016
and 2017.
Exchange Rates
Exchange rates are an important factor to be
cognizant of since many companies generate
substantial sums of revenue abroad. When the
United States dollar is weak relative to foreign
currencies, foreign buyers may perceive goods as
absolutely cheap in comparison to the price of goods
when the dollar is strong (and vice-versa).
Additionally, when the dollar is too strong,
multinational companies may experience substantial
losses in currency translations. Since many
technology companies conduct business outside of
America, taking exchange rates into consideration is
important when evaluating various investment
opportunities.
Economic Outlook

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The graph above shows historical and forecasted values
for the U.S. Dollar Broad Index. Given our research and
the historical trends, we predict by the end of 2015 that
the U.S. Dollar Broad Index level will rise to 113 within
the upcoming six months, and then weaken to 108 the
following year. The Broad Index compares the relative
value of the dollar to a number of other currencies since
1997.iii
We believe the U.S. economy will close out the
year strong, while the Europe and other regions of the
world lag behind. Hence, the dollar will finish stronger
at year-end. Conversely, we believe the European
Central Bank’s (ECB) quantitative easing policy that is
likely to be enacted may jumpstart their economy again.
Thus, as Europe and other regions recover economically,
the dollar’s value may diminish slightly. A weakened
dollar in the future translates to cheaper prices for the
overseas market. Therefore, technology companies with
significant operations abroad will be better positioned to
bring back home profits.
Current Employment Statistic
Unemployment is inversely related to GDP growth so
when GDP is low, consumer confidence is low, and
consumers are less likely to purchase discretionary
technology products. Current levels of unemployment,
as of March 31st
, 2015, are at 5.5% according to
Bloomberg’s Economic Calendar. During the latter part
of 2015, we believe unemployment will continue the
downward trend to levels of around 5.2%. In the next
few years, we predict the unemployment level will
remain stagnant. Our assumption based upon the current
economic conditions and placement in our expansionary
period is that levels will around 5.0%, as a result of the
increased population entering the labor force and
increased hiring by companies. The Philips Curve,
which represents the correlation between unemployment
and wage inflation, states that lower unemployment
levels lead to higher wages because tighter labor markets
incentive companies that are looking for employees in a
scarce market to offer competitive wages in order to
poach employees and also attract the brightest levels of
talent.
We foresee hours worked, along with wages steadily
increasing over the coming years. Our prediction is that
the average wage will increase 3% this next year. This is
in line with the annual 2.1% increase of the Consumer
Price index for an estimated salary net gain of 0.9% in
2015.
Longer term, we anticipate a recovery in oil prices and a
slower than expected GDP growth, supporting the 1.0%
historical level net salaries have been increasing at. As
we distance ourselves from the great recession and
competition in the labor markets begin to increase, we
expect hours worked to slightly decrease as companies
seek to position themselves as more attractive employers
to job seekers.
Labor force is important to the technology sector
because labor drives businesses. Businesses are either in
the expansionary state and continuously hiring or they
are contracting and laying people off. If the labor force
cannot sufficiently produce enough qualified candidates
to fill vacant roles than companies generally suffer. With
labor force participation rates falling, and no abrupt
changes in sight, the outlook going forward for the
coming months should not greatly alter business. But, in
10 years when a majority of the population age shifts
from the 55-64 age level onto the younger generation we
can expect to see some significant changes in the way
technology companies, and all companies for that
matter, hire employees. The current level of labor force

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participation is at 62.5%. We believe we will continue to
see a steady decline in the labor force participation for
the next 2-3 years due to retiring baby boomers. The
Congressional Budget Office projects that Obamacare
could reduce the labor force by an additional two million
full time workers. At the end of 2013, there were a record
high 11 million people receiving some sort of disability
benefit. Taking into account the previously listed factors,
we expect the labor force rate to fall around 60.0% to
61.0% within the next two to three years.
Capital Markets Outlook
Based on our economic outlook and analysis, we expect
that the stock market will experience moderate growth
throughout 2015. We project that the federal funds rate
will experience a gradual growth of about 0.14%
throughout 2015, eventually causing the stock market to
experience moderate corrections towards the second half
of the year. The growth in the economy will be result of
various economic variables such as Gross Domestic
Product, Inflation, Exchange Rates, and Employment
Levels. Since the technology sector is ultrasensitive to
movements in the economy, we believe that this
projected market growth in 2015 will cause industries in
the technology sector to experience above average
returns.
We predict that the S&P 500 will experience various
minor corrections throughout 2015, but ultimately,
maintain a level around 2,100 points. We do not foresee
any substantial corrections in the market; however, it is
unlikely that the market will maintain the same growth
trends we have seen the past few years.
We decided to focus on a select few industries within the
Technology sector that we believe have the greatest
potential for growth, ROI, and can establish and
maintain economies of scale. The two being: Software,
IT Services, and Internet & Software industries.
Economic drivers, such as GDP growth and the rate
Inflation will play a large role in assisting the growth of
these industries in 2015. Inflation has proven to be a key
driver of the technology industry. Technology firms
monetize on volume, as opposed to monetizing on price,
as a result of most of the sectors’ products being in
perpetual state of deflation. The slowing inflation rates
can be a positive technology sector driver. As inflation
slows, the task of continually establishing economies of
scale and improving production to sustain profit margins
becomes less difficult (Erne, 2010). According to the
bureau of labor statistics, CPI decelerated its growth
from 1.5% throughout 2013 to 0.8% during 2014.iv
According to the recent data posted by the Federal
Reserve on January 30, 2015, GDP had increased at an
annual rate of 2.6%, on average, throughout the year in
2014.v
We project oil prices to remain relatively low
throughout the year and unemployment to decline
modestly from 5.6% to 5.2%. We expect that these
events will assist in increasing consumer spending,
resulting in improved GDP numbers. As stated in the
economic outlook, we believe that this GDP trend will
continue to grow at an average rate of 2.8% throughout
2015 (BEA, 2015). Historically, the technology sector
has outperformed the stock market when GDP has risen;
thus, given our GDP predictions we believe the
technology sector will outperform the stock market in
2015.
The technology sector and the financial sector seem to
be highly correlated. Both sectors are highly sensitive to
the fluctuations of capital markets, thus they tend to have
higher betas in comparison to the benchmark
performance of the S&P 500. Historically, the betas for
Technology and Financial sectors have been 1.73 and
1.44, respectively (Erne, 2010). Due to this correlation,
we also foresee the technology sector benefitting from
the financial sector as interest rates increase, leading to
increased revenues for banks and other financial
institutions. These institutions purchase products from
the technology sector and invest in technological firms,
especially in the software and computer service
industries.
We do have one concern with the technology sector.
Technology firms generally pay less in dividends; this
leads to companies retaining a higher portion of
earnings, which are subject to capital gains. Lower rates

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on capital gain taxes could be lucrative for these firms.
However, in the recent State of the Union address on
January 20, 2015, President Barack Obama voiced his
proposal to increase capital gains rate, which is currently
at 20% for the highest-earning Americans, to 28%. If this
law is enacted, it could cause the technology sector to
slowdown.
Industry Description
The “Internet Information Provider” industry is often
referred to as the internet search engine and online
advertising Industry. This 12.53 trillion dollar industry
often integrates itself to adapt to the “multi-screen
environment” that today’s technology provides (3). The
main driver of this industry is the growing access to
internet on a global scale. From this growth driver, stems
innovations in internet accessible devices, internet
availability, internet speed, and products and services
that the internet provides. More individuals are “going
online” either more often or for the first time, mainly as
a result of depreciating computer prices and increased
popularity of mobile smartphones. According to
internetlivestats.com, as of July, 1 2014, 2,925,249,355
individuals, or 40.4% of the world’s population are
considered “internet users” (4). As of 2014, this
population of internet users is experiencing an annual
growth rate of 7.9%, while the world’s population itself
is experiencing an annual growth of 1.14% (4). We
believe that by mid-2015, over 3.4 billion individuals,
will be considered internet users.
Firms in that dominate this industry—such as Google,
Apple, Yahoo, Amazon, Microsoft, and Facebook—that
continually innovate their business models to adapt to
the changes in the internet, succeed in shaping this
industry. Additionally, the reach of these firms’
influence from their operations extends far beyond the
search engine and online advertising industry. New
technological developments, along with innovations in
software, products, and services in this industry, have the
ability to spawn new sub-industries or run other
industries out of business.
Markets and Competition (1)
The search engine industry is extremely concentrated
and the degree of concentration is increasing. In 2009,
the top three companies—Google, Yahoo, and
Microsoft—generated approximately 88% of the
industry’s revenue; in 2014, 94.7% of the industry’s
revenue was generated by the top three companies. As a
company’s search results become more useful, the
number of users of a particular search engine increases.
When a search engine’s user base increases, more
advertisers are willing to pay to be featured on the site.
The new revenue may be used to improve search results,
leading to a larger user base, and thus effectively causing
a cycle.
Search engines compete for both advertisers and users.
The larger the user base, the more willing advertisers are
to pay premiums to particular search engines. Search
engines compete for users based off quality of results,
ease of use, speed, and name brand.
Porter’s 5-Forces
Threat of new entrants: WEAK due to strong barriers of
entry. Companies competing in this market need highly
specialized IT professionals. The amount of workers
with this skill is scarce when compared to the number of
companies seeking their expertise. Additionally, the
brand recognition of the existing search engine
companies thwarts the ability of new entrants to have
success in the field.
Threat of substitute services: MODERATE since
customers are primarily concerned with the size of a
search engine’s user base. Companies rely on a large
user base to attract advertisers. Switching search engines
is relatively easy for users, and cost the user nothing.
Users may only lose convenience to switch. In order to
encourage brand loyalty, search engines provide
additional services such as email, news, online storage,
etc. Additionally, search engines are also competing
against other advertising mediums including but not
limited to: television, newspaper, radio, etc.
Industry Analysis

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Power of customers: LOW because advertisers have a
limited selection of search engines to partner with.
Furthermore, industry leader Google commands higher
pay-per-click prices as a result of its search query
dominance. As of 2014, Google had 75% of the
industry’s market share, as shown in the graph below.
Companies seeking to reach customers through internet
advertisements essentially do not have an option of
partnering with Google (1).
Bargaining power of suppliers: HIGH. Due to most
products and services being generated internally, there
aren’t strong forces coming from outside. However,
since software companies are dependent on internal
software engineers to produce and code software, the
employees may be classified as suppliers. Demand for
IT professionals greatly outweighs the supply of
workers. Hence, workers command high average
salaries ranging from $75,000 to $90,000.
Intensity of Competition: HIGH due to companies
targeting the same users and advertisers. Companies
compete on user base, price, and number of partner
websites. In a space where one’s product or services may
become obsolete almost instantly, technology
companies are continually striving to innovate and stay
relevant. Search engines must constantly update their
algorithms to ensure users’ needs are met. A happy user
base leads to more users and thus translates to increased
marketability for the search engine.
Google is the industry frontrunner—holding a 75.2% of
market share for search engines. As of June 2014,
Google had 52,069 employees and recorded revenue for
the year 2014 of $59,056 billion. The graph below
outlines the projected growth of the Global Software and
Services industry.
Industry Catalysts for Growth Going Forward
Economic Growth
Economic growth is the single largest driver of the
technology sector. While technology is economically
sensitive, there is more to the correlation. Industries can
have vast differences in performance based upon which
stage of the business cycle they’re leveraged too. With
growth beginning to slow, and the Fed looking to raise
rates later this year, the future outlook appears bleak. As
expansion turns to contraction, companies may have to
slash spending in areas such as advertising, research and
development, and potentially wages. Decreased wage
spending can have serious adverse effects if companies
aren’t able to attract and retain talent.
Economic Drivers
Exchange rates play an important role in the profitability
of US companies. A strong dollar may seem favorable
for the US economy, but the numbers tell a different
story. While it is impossible to know for sure where
prices will go in the future, the current rates are
unfavorable for American companies competing in
foreign markets. A strong dollar relative to foreign
currencies generally makes products more expensive for
consumers, and in Googles case, it makes advertising
more expensive for companies that are seeking to utilize
Googles advertising platform. The euro and the dollar
being comparably even creates an opportunity for future
revenue growth in the technology sector. If the euro
begins to recover, disinflation will have a positive effect
on the technology sector.
With inflation being relatively low historically, there
doesn’t seem to be much arbitrage opportunity available
to capitalize on; but on the other end of the spectrum,
unanticipated inflation would have a far greater
devastating effect on the economy and the technology
sector than would an anticipated event. And it appears
that all of Wall Street is heavily anticipating a Fed rate
hike before the conclusion of 2015.

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Diversification
Core PPI is inversely related to the performance of the
IT sector. Technological equity plays can add
diversification to any portfolio. The substitution effect,
which claims that companies will have more money for
discretionary spending as prices fall, suggests an
overweight position in technology when YoY PPI falls
below 2.3 percent will enhance the overall portfolio
return.
Industry Outlook
Corporations are allocating larger percentages of
advertising budgets to internet advertising as people
spend more time online, especially in comparison to
other media outlets. The growing adaption of
smartphones is also a positive for interactive advertising,
and can cultivate traffic and usage. Video advertising is
an emerging opportunity. The ability to monetize mobile
ads and social media will greatly depend upon the ability
to tactically utilize video ads on a large scale, as mobile
advertisements reap fewer financial benefits in
comparison to other advertising platforms.
As of 2014 EOY, the global software & services industry
has a value of $2.946 trillion. The expected compounded
annual growth rate for the industry from 2014 - 2019 is
4.9%. According to a 4.9% CAGR, the industry will be
worth an estimated $3.748 trillion by 2019, or a 27.2%
increase since 2014. This is portrayed on the graph at the
top of the next page.
Cash is King
As of December 31st
, 2014, Google had $64.4 billion
dollars in cash, cash equivalents and marketable
securities. However, $38.7 billion of the $64.4 billion of
cash is held by their foreign subsidiaries. In order for
Google to obtain these funds for operations within the
US, they would be subject to U.S. taxes to repatriate
these funds. The large sum of cash Google possess gives
them some leverage. Google could potentially pay
dividends in the future. If used strategically, the large
cash sum allows them swipe up any potential startups
gaining traction, which will help strengthen their core
businesses and continue to develop and explore new
opportunities.
Cyber Security Threats
“It takes 20 years to build a reputation and five minutes
to ruin it. If you think about that, you’ll do things
differently.” – Warren Buffet.
In relation to the quote above, cyberattacks have the
ability to destroy market share and reputation in a matter
of seconds. Malicious attempts to breach firewalls can
adversely affect the customers trust. With less brand
loyalty occurring today than ever it is inherently
important for companies to capitalize and seek to satisfy
not only the customers they currently serve, but those
they hope to serve in the future.
Key Investment Positives
Key Investment Negatives

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Investment into New Technology
Something so obvious may often be over looked, but the
inherent risk assumed with investing into researching,
developing, innovating, and the expenses and risks
associated with such gambles should not be taken
lightly. Innovation drives the technology industry. The
fear of an insufficient return on capital and inadequate
revenues failing to offset the liabilities and expenses
incurred during such endeavors creates an uncertain
future for those companies who cannot stay competitive
and innovative.
Intellectual Property Rights
Current regulations protect the financial incentives tied
to innovation, which keeps our economy moving
forward. Although, according to the strong form of
market efficiency, financial incentives have already
been priced into the current market value. With no signs
of increasing the life individuals are able to hold patents,
there is only a pessimistic outlook on the capitalism tied
patent protection. “Intellectual property rights are one of
the most important critical components of capitalism and
properly functioning free markets.” (Fisher
Investments). Any change in the way patents are
regulated could discourage the way companies invest in
research and development. Without those added
financial incentives the first mover advantage seems to
offer, companies could experience exponential margin
decreases.
Due to current and forecasted micro and macroeconomic
factors, recent industry trends, and Google’s
management’s forecasts, we believe that Google will
experience ample revenue growth in 2015. Google has
accomplished everything they need to grow and innovate
while maintaining their leading market capitalization in
their central industry. Large research and development
expenditures in addition to acquisitions and new projects
in recent years have provided Google with a foundation
for continued growth. Google has also opened several
new channels for revenue streams as a result of newly
initiated programs and side projects.
Production and Distribution
Google develops its own software and hardware
infrastructure. In doing so, Google is provided with
substantial computing resources at low cost. Google’s
research and development expenses for segment
increase $687 million from 2012 to 2013 due to an
increase in labor and facilities-related costs of $596
million (7). Google’s substantial investment in
developing their infrastructure has led them to capitalize
on several benefits:
 The infrastructure maintenance and design acts as a
relatively fixed cost that can be spread across many
aspects of Google’s cost structure.
 This infrastructure, simplifies the storage and
processing of large amounts of data and improves
the operation of large scale, global products and
services.
 This infrastructure allows google to apply superior
search and retrieval algorithms that are
computationally complex, saving them money on
hiring additional programmers and coders.
 The infrastructure makes the product development
cycle run more efficiently, allowing Google to
innovate in a more cost effective manner.
Google expects to continue to experience growth in their
operations as they build upon their research and
development programs, expand their user base,
advertising clientele, google network members, content
providers, and increase their presence in international
markets.
Cost of goods sold for the Google segment increased by
$4.7 billion from 2012 to 2013. According to Googles’
2013 annual report, the increase was due to increases in
traffic acquisition costs of $1.3 billion as a result of
increasing distribution fees in addition to more
Executive Summary

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advertiser fees generated through Google’s AdSense
program (7).
Googles’ products and services innovate web search and
advertising techniques to create a competitive
advantage. A significant amount of Google value
proposition in their business model rests on their
innovative and proprietary programs AdWords and
AdSense. These programs benefit both user of Google’s
online search engine by accurately and efficiently
retrieving the information they are searching for while
promoting the advertising company’s business.
Competition
Google is the top player in their industry for online
advertising. The business environment is experiencing
rapid change and convergence. Google faces
competition in every aspect of their business. Primarily
this competition stems from companies that seek to
connect people with information on the web and
promote relevant advertising. Online advertising
companies, advertising companies, and internet
information providers are the main industries that
compete with Google.
Google’s main competitors include traditional search
engines, such as Yahoo! and Microsoft Corporation’s
Bing, vertical search engines and e-commerce sites
(WebMD for health-related queries), Kayak.com (for
travel-related queries), Amazon.com and eBay (for
commerce) (7). The threat to Google is that, although
Google may offer some of the services that these
websites provide, users may decide to just navigate
directly to these sites, rather than first going through
Google.
Other competitive industries of Google that may threaten
Google’s main source of revenue (advertising) include
traditional forms of advertising, such as television, radio,
magazines, and billboards. We believe that this is less of
a threat than Google’s immediate, website-based
competitors. Google is overcoming this threat by
globally establishing itself as an innovative, secure, and
efficient company. Examples of this initiative include
Google’s side projects such as the Google car, the google
phone, and google glasses. All of these innovative
projects are widely publicized and benefit Google not
only by the revenue generated, but by the free-
advertising and publicity Google receives via word-of-
mouth
As Google’s popularity spreads, we believe that
consumers may subconsciously tend to use Google more
than search engine alternatives such as Yahoo!,
Microsoft Bing, or MSN. Recent grand-expenditures on
research and development, will finance Google’s new
facilities, research and development employees, and
software and hardware maintenance and innovation.
Comparative Analysis
Currently, Google appears to have the largest market
capitalization out of all of its closest competitors and
does not appear to have any weaknesses in its revenue
stream and shareholder satisfaction.
Competitive Environment
Google is competing to attract and retain users of their
search and communication products and services. Most
of the products and services the Google offers its users
is “free,” so they are not inclined to compete on price.
We believe that this relieves Google of a great market
pressure, so that Google can instead focus its
competitive advantage on the improving relevance and
usefulness of their search results and features, ease of
accessibility, and use of their products and services.
Google’s competitive advantage and mission, as stated
in their annual report is that they are able to provide
high-quality and universal accessibility that makes them
effective and profitable when organizing the world’s
information--and do so extremely cost effectively (7).
Google also relies on their patent, trademark, copyrights
as well as contractual provisions to protect their
proprietary technology and their brand, this creates a
competitive advantage from them.
Google’s competitive edge is backed by its many
patents, trademarks, copyrights, as well as contractual
provisions to protect their proprietary technology and
their brand. These registered trademarks include:
Google, YouTube, AdSense, AdWords, Gmail, I’m
Feeling lucky, blogger, are all registered in the U.S. We
believe that all of these trademarks have proven to be
exceptionally lucrative for Google. Today, Educational

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Institutions ranging from grade school to graduate
school use YouTube in professional slide presentations
to help explain concepts, in classes to watch
documentaries and interviews, and sometimes for
entertainment purposes. “Google docs” is another
segment of Google’s that is critical in the educational
and professional world today. Google’s Brand is one of
the strongest assets it currently possesses. We believe
that in addition to Google’s advertising segments, its
software, websites, and programs will continue to grow
in the future.
Overview
Google is an international technology company that
offers advertising, operating systems, enterprise, and
hardware products (11). Google’s headquarter is located
in Mountain View, California. As of December 31,
2014, the company employed 53,600 employees (12).
Google delivers its products and services in over 100
languages, serving over 50 countries (12). Google is
primarily in the business of offering search and display
advertising, the Android operating system platform,
consumer content, enterprise, and hardware products
and services.
Google was founded by Sergey Brin and Larry Page, two
Stanford graduate students. Initially incorporated in
1998, the company responded to 100,000 searches per
day in its first year. By 1999, the Google’s search feature
was utilized approximately 500,000 times a day. Today,
with revenue of $59,825 million for the year ended 2013,
Google is one of the largest technology companies in the
world (7). Search and display advertising is the core
business of Google, however, the company offers other
products such as the Android operating system,
consumer content, and hardware products.
Government Regulation
Since Google is a worldwide website, it is subject to a
number of foreign and domestic laws and regulations
that affect companies conducting business on the
internet (7). Possible threats to Google’s business may
encompass any court ruling that imposes liability on
providers of online services for the actions of their users
and/or third party affiliates.
Corporate Strategy
In order to optimize profitability, Google focuses on the
following:
Serving the users—making products that are user-
friendly, quick, and convenient.
Providing advertisers a medium to reach potential
consumers is the core competency of Google. In order to
appeal to its customers—advertisers—Google provides
a plethora of products, and strives to be user-friendly.
Bringing the next five billion online—investing in
projects that will increase the world’s accessibility to the
internet. Google has projects to assist other areas of the
world gain access to the internet. As previously
mentioned, the larger the user base, the more income
Google can generate from advertisers.
Research—Continual development of existing products
and services as well as growing new ideas with evidence
to support various projects.
Research and development expenses were 15% of sales.
We believe research and development cost will increase
slightly as a percentage of sales for the forecasted period.
General Information

[AUTHOR NAME] 11
Products and Markets
Google products include search, advertising, consumer
content, and enterprise products (6).The companies
search algorithms sort through a plethora of websites and
internet content to best answer a user’s search query. The
company also displays related product advertisements to
enhance the users experience by conveniently providing
information pertinent to queries.
Google’s advertising business is primarily auction-
based. Google enables companies to advertise when
relevant searches are queried. Advertisers typically pay
on a per-click basis—charged each time a user clicks on
the advertisement. Conversely, some advertisers select
the cost-per-impression option—charged for how
frequently the advertisement is displayed.
Major Products (6)
 AdSense
 AdWords
 YouTube
 “Google Play”
 “Nexus” Devices
 “Google for Work”
 Google Networks
As exhibited in the chart above, Google’s revenue-per-
click has been declining drastically over the past few
years. Last year, revenue-per-click decreased by 5%. We
anticipate this trend will continue. Conversely, we
predict that the benefit from additional paid clicks will
outweigh the lost revenues. In the previous year, Google
had an aggregate increase of 20%.
The company’s consumer content business includes
Android and Google+. Android, which is comprised of
over 75 mobile-phone, technology companies, is a
platform to create applications for mobile-phones,
iPhones, tablets, etc. (6). Google+ is a social medium
with approximately 540 million users as of October
2013. Additionally, Google offers: Google Play, a digital
entertainment store for applications, music, movies, etc.;
Google Chrome, a web-browser; Chromebook
computers and Chromecast products.
Google enterprise solutions provides enhanced versions
of common google products, such as Gmail, Drive,
Calendar, etc., to fit unique requirements of businesses.
Motorola mobile
Google formerly maintained a mobile-device business
segment, selling hardware and related services. In 2014,
Google sold the Motorola mobile segment to Lenova for
approximately $2.9 billion (7).
We believe the divesture was a good move. The mobile-
phone market exhibits extreme competition and the
segment was not aligned with the core business strategy
of the company. Although, Google purchased Motorola
for significantly more a couple years prior, the sale was
not completely terrible as a result of Google maintaining
the rights to many of Motorola’s patents.
Google’s Catalysts for Growth & Change
Emerging Markets and Increased Globalization
As the third world countries begin to develop, we will
see mass adaption of the technologies used across
mature economies. One of these technologies used
across multiple platforms, countries, and continents is
google search. Google is the leading search engine
worldwide and continues to develop and improve as
more information becomes readily accessible with each
passing day.
Market Share
Google has a dominant portion of the search engine
industry, and this only appears to be growing with time.
The innovation and continuous improvements make it
highly probable that Google will continue to dominant
the search engine industry for a long time to come.
Google makes a majority of their revenue through
advertising. There is a lot to be said for a company with
a $368B market cap that made roughly 91% of their
revenue from one area; that area being advertising. On
the other hand, with low overhead costs and extremely
high profit margins, it is no surprise that they should
milk every last dollar from what they are established and
dominant at. We believe google will continue to profit
but not at the margins they are seeing today. Increased
traffic leads to increased costs, such as server farms, data
warehousing, data mining, and hiring the talent to

[AUTHOR NAME] 12
manage and build this all can be quite costly. But, if
Google continues to grow and manage their billions of
dollars of cash appropriately, utilizing stock buyback
programs and making investments for the future, they
will remain profitable and sustainable in the long run.
Currencies and Trade Policy
The strengthening of the US dollar compared to the
Euro, Yen and British Pound negatively impacts
Google’s revenues. Google will continue to make
investments into foreign markets, but it may not see an
increase in international revenue as a percentage of total
revenues. Trade policy also plays an important factor in
the accommodativeness and or restrictiveness of specific
products being traded. Laws can provide an unfair
advantage to some industries and disadvantages to
others. We believe trade policies will continue to have a
sizeable effect on the overall sector performance.
SWOT Analysis
Strengths
Google is an industry leader when it comes to searching
the internet for any information that comes to mind.
What sets Google apart in terms of search engines is
their trade mark algorithms that return search results
faster than any other competitor with a higher degree of
relevancy and accuracy. With an attractive website that
sees over 3.5 billion searches a day (15), capitalizing on
the opportunity to advertise via google is something that
many companies seek to do because of the exposure they
can potentially get. The graph below shows how the
annual searches on google have increased exponentially
the past 10 years.
Weaknesses
With 55% of Googles revenue in 2013 coming from
international markets and the strengthening of the US
dollar compared to the Pound, Yen and Euro, we expect
to see their revenues underperform relative to the
consensus in 2015. The exposure to currency risk is one
that can be managed and hedged against with currency
futures contracts. Having this sort of insurance will
minimize the potential decline in revenues due to the
markets natural roller coaster motion, but their size
doesn’t necessarily make them expert hedgers.
Something that always seems to haunt very large
organizations are legal fees. We expect to see continued
spending related to new offerings and government
inquires/investigations, including the European
Commission announced this month. Another weakness
Google faces is their declining profit margin, as denoted
by the graph below.
Opportunities
One major opportunity that lies ahead for Google is the
increased smartphone usage across countries. Google
will continue to gain traction in the mobile search
industry and will continue to capitalize as the global
economy becomes more interdependent and reliant upon
cutting edge technology. Another opportunity is the
ability to implement, utilize and profit from video ads,
via YouTube, mobile phones, and new users coming
online for the first time.

[AUTHOR NAME] 13
Threats
A threat that is always lurking around companies,
especially companies that function primarily over the
internet are cyberattacks. If google were to experience a
hack and sensitive information fell into the wrong hands
than it is highly probable that customers, and the general
population may have a shift in opinion towards Google’s
storing of mass amounts of data in their data warehouses.
This could also tarnish their reputation and brand name
which would affect future business, such as BP with the
Gulf oil spill. The loitering problems of a potential
market share loss, excess expansion costs, and adverse
legal developments could all adversely impact Googles
revenues.
Revenue Decomposition
As Google’s 2014 annual report indicates, Google’s total
revenue is divided into two segments: advertising
revenues and “other” or “non-advertising” revenues.
Advertising revenues is comprised of both revenues
generated from Google’s Websites and revenues
generated from Google’s Network Members’ websites.
In the fiscal year ended 2014, advertising revenues
constituted 89% of Google’s total revenues, leaving non-
advertising revenues to represent 11% of their total sales.
Historically, Google’s revenue structure has been
heavily weighted on their advertising sales, which have
averaged about 93% of total sales over the course of the
past five years. Recently, however, Google’s revenues
from non-advertising operations have begun to increase
as a percentage of total sales. Non-advertising revenues
as a percentage of total sales increased from 4% in 2011,
to 5% in 2012, 9% in 2013, up to almost 11% in 2014
(1). This change in revenue structure can be attributed to
both Google’s initiative to improve their products and
services to adapt to the world’s “multi-screen
environment” and also to Google’s international sales.
Critical Assumptions
Costs of Goods Sold
Since historical cost of goods sold expenses in direct
relation to total revenues has remained fairly constant,
we calculated Google’s cost of goods sold expense at a
constant rate of 35% of forecasted revenues.
Selling, General, and Administrative Expense
Google’s selling, general, and administrative expenses
are composed of research and development expenses and
“other SG&A” expenses. In order to accurately forecast
total SG&A expense, we forecasted the two sections of
Googles SG&A separately. Google’s Research and
Development expenses as a percentage of total sales has
continually increased from 6% in 2010 to 34% in 2014.
We believe that Google is heavily investing in research
and development in order to improve their search and
advertising operations and improve their products and
services such as Google Play, Google for Work, and
“Nexus” devices. These products and services provide
software video games and apps, online music, online
videos, and other trends that are currently driving this
industry. In doings so, Google can better compete
against its top competitors: Apple, Amazon, and Yahoo.
Using this rationale, we forecasted Google’s Research
and Development Expenses to be as 15% of forecasted
revenues in the short term, 16% in the midterm, and
15.5% in the long term. Based on average historical
“Other SG&A” expenses as percentage of total
revenues, we forecasted that “Other SG&A” expenses
will grow at a constant rate of 23% of forecasted
revenues.
Amortization
We used a common sized income statement for Google
and determined the average of historical amortization
expenses as percentages of historical total revenues. We
got that, on average, Google’s amortization expense has
been 20% of total sales. We believe that Google’s
Amortization expenses will increase in the future as a
result of
Goodwill
Our group believes that attempting to forecast any
company’s future net goodwill payments is extremely
difficult and seldom free of error. Therefore, in order to
provide our most accurate valuation of Google, we set
Google’s Goodwill to a constant value throughout our
forecasted period. That value is $15,599 million, which
is the net, goodwill value on Google’s 2014 balance
sheet.
Share Buybacks
Google has had no history of Treasury stock in the past
five fiscal years, and therefore no history of repurchasing
Valuation Discussion

[AUTHOR NAME] 14
shares of stock. Our assumption for the forecasted
period, is that Google will continue not to participate in
share buybacks; however, since they have never
historically bought back shares, any future plan to buy
back shares could have a vastly positive impact on the
underlying stock price.
WACC
Cost of Equity
We utilized the Capital Asset Pricing Model (CAPM) to
calculate the required rate of return on equity for Google.
We used the current rate of return on a 30-year U.S.
Treasury bond for the risk-free rate. This rate was 2.51%
as of April 2, 2015. For the market risk premium, we
used 5.0%, which is the geometric average market risk
premium of our valuation’s performance benchmark, the
S&P 500, from 1928 to 2014. Finally we calculated
Google’s beta by using a Bloomberg terminal to track
their five year historical beta on five different days,
receiving an average beta of 0.93. Plugging in all of the
CAPM inputs gave us a cost of equity equal to 7.16%
Cost of Debt
Ideally, we would have calculated Google’s cost of debt
by simply finding the require rate of return on debt for a
Google 30-year corporate bond. Unfortunately, Google
only issues 10-year corporate bonds. We decided to
calculate the cost of debt by researching Google’s bond
credit rating and using the required rate of return on debt
of a similar credit-rated company’s long-term corporate
bond. Google’s S&P 500 bond credit rating is AA, so
since Apple is rated AA, we used a 30-year Apple
corporate bond. The pre-tax cost of debt on this bond
was 3.71%. We then calculated the after-tax cost of debt,
to be used in the WACC calculation, by multiplying the
pre-tax cost of debt by one minus Googles marginal tax
rate of 38.5%. This calculation gave us an after-tax cost
of debt of 2.78%
Weight of Equity
Our group first calculated the market value of equity by
multiplying the amount of shares outstanding by the
current stock price as of April 2, 2015. Then we divided
the Market value of total equity by the market value of
the firm’s total capital which is the sum of the firm’s
market value of equity and market value of debt.
Weight of Debt
Our group first computed Google’s market value of total
debt. This included Google’s short-term debt, long-term
debt, current-portion of long term debt, and the present
value of the minimum payments of Google’s current
operating leases. This value was then divided by the
market value of the firm’s total capital which is the sum
of the firm’s market value of equity and market value of
debt.
*Google had no preferred stock outstanding in 2014.
DCF & EP
When using both the discounted cash flow and economic
profit models, our group computed Google’s (GOOG)
intrinsic stock price to be $676.48 per share. While using
the discounted cash flow method, we chose to use a
forecast horizon of 8 years into the future. We believe
that this forecast horizon will provide an accurate
estimate of Google’s future stock price, after taking into
account current and forecasted market trends, forecasted
micro and macroeconomic events, and Google’s
management’s discussion of future acquisitions, capital
expenditures, productivity, and growth.
After 2022, we forecast that Google will grow at
continuing value rate of 3.20%. We estimated their
growth to slow down because of the oversaturated
technology market. Also, Google having roughly an
80% global market share in the search industry, it will
become increasingly harder to seize market share.
Our calculated intrinsic price for Google’s stock of
$682.76 is fairly higher than Google’s current stock
price of $535.53, as of April 17, 2015. This reflects a
we believe that our DCF price accurately reflects the
value of Google’s operations after accounting for
various values of non-operating assets and values of debt
that Google experienced in 2014. This represents a
27.5% price increase. We see essentially unlimited
upside, with little downside.
Several of Google’s actions in the past fiscal year have
signaled that they forecast an increase in the growth rate
of their revenues. One signal that Google may be
undervalued, is that in the “Management’s Discussion
and Analysis of Financial Condition” section of
Google’s 2014 annual report, management noted that
they expect to continue spend cash on acquisitions and
other investments, instead of using Google stock to
finance expenditures. This indicates that their stock has
greater value to them than cash.

[AUTHOR NAME] 15
DDM
Google has no history of paying out dividends, therefore
it has a historical dividend payout ratio equal to zero.
Since we couldn’t use the traditional dividend discount
model to compute the intrinsic price per share of Google
stock, we used a “theoretical dividend discount model.”
To do this, we calculated Google’s theoretical dividend
payout ratio by subtracting the retention ratio from
earnings from one. We calculated the retention ratio by
dividing the estimated continuing value of revenue
growth percentage by the estimated, continuing value of
return on equity percentage. After calculating the sum
of the present value of Google’s theoretical dividends
throughout the forecast period, we discounted the
dividends by the return on equity discount rate. This
gave us an intrinsic stock price of $762.02. Our last step
was that we adjusted the intrinsic stock price for the
partial year elapsed. This gave us a final, adjusted target
stock price for Google of $777.63.
Sensitivity Analysis
Pre-Tax Cost of Debt vs Cost of Equity
Using a Pre-tax cost of debt of 3.71% and a 7.16% cost
of equity to examine the WACC sensitivity allows us to
simultaneously evaluate the impact that movements in
both the fixed income and the equity markets have. As
our analysis concludes, fluctuations in the cost of debt
do not vastly effect the WACC.
Beta vs Equity Risk Premium
Running this sensitivity analysis allowed us to test the
GOOG’s intrinsic stock price sensitivity to the natural
fluctuations of the market both internationally and
domestically. Higher risk premiums lead to a lower stock
price, which is more likely to happen in expansionary
periods, given the inflated returns investors obtain
during times of economic prosperity.
SG&A vs COGS as % of Sales
This regression allowed us to forecast what could
potentially happen if Google were to increase COGS.
We see the declining labor force increasing wages, thus
increasing COGS. Also, as Google enters foreign
markets and continues to gain traffic on websites they
will need to increase spending on high cap ex items such
as data warehouses, new engineers & other employees,
just to name a few.

[AUTHOR NAME] 16
Sources
(1) Google, Inc. (2014). Form 10-K 2014. Retrieved
from website
http://investor.google.com/financial/filings-
archives.html.
(2) MarketLine "The University of Iowa
Libraries." Proxy Login -. Web. 11 Feb. 2015.
(3) Erne, B., Teufel, A. (2010). Fisher Investments on
Technology (pp. 43-65). Hoboken, N.J: John Wiley
& Sons. February 1, 2015.
(4) National Data." U.S. Bureau of Economic Analysis
(BEA). N.p., n.d. Web. 04 Feb. 2015.
(5) Trade-Weighted Dollar Definition |
Investopedia." Investopedia. N.p., 24 Nov. 2003.
Web. 04 Feb, 2015.
(6) Crawford, M., Church J., Akin B. (2014) U.S.
Bureau of Labor Statistics, “BLS CPI Detailed
Report (PDF),” CPI Tables, website
http://www.bls.gov/cpi/tables.htm, February 4,
2015.
(7) U.S. Bureau of Economic Analysis, “Gross
Domestic Product: Fourth Quarter and Annual
2014.
(8) Kessler, S. “Computers: Commercial Services.”
S&P Capital IQ Industry Surveys, January 2015.
NetAdvantage. Web. February 10, 2015.
(9) Diment, Dmitry. IBISWorld Industry Report
51821.IBISWorld, 2015. Web. 5 Feb.2015.
(10) Mergentonline. Mergent, 2015. Web. Feb 5,
2015.
(11) Erne, B., Teufel, A. (2010). Fisher Investments
on Technology (pp. 69-97). Hoboken, N.J: John
Wiley & Sons. Feb 7, 2015.
(12) Search Engine Industry: Competitive
Landscape. IBISWorld, 2015. Web. 25 March
2015.
(13) "Google Inc." Yahoo! Finance. Web. 14 Apr.
2015.
(14) "Google Search Statistics." - Internet Live
Stats. 2015. Web. 14 Apr. 2015.
Important Disclaimer
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund and
its advisory board. The report also provides potential
employers and other interested parties an example of the
students’ skills, knowledge and abilities. Members of the
Krause Fund are not registered investment advisors, brokers
or officially licensed financial professionals. The investment
advice contained in this report does not represent an offer or
solicitation to buy or sell any of the securities mentioned.
Unless otherwise noted, facts and figures included in this
report are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Krause Fund may hold a
financial interest in the companies mentioned in this report.

Weighted Average Cost of Capital (WACC) Estimation
Market Value of Debt 10,298
LT Debt 3,228
ST Debt & Current Portion of LT debt 2,009 Cost of Debt After-Tax Cost of Debt
PV of Operating Leases 5,061 3.71%
Pre-tax Cost of Debt 3.71% x 2.78%
Marginal Tax Rate 25.00% 1-Tax Rate X
After-Tax Cost of Debt 2.78% 75.0% Weight of Debt 0.08%
Average Weight of Debt 2.75% 2.7%
+ WACC
Market Value of Equity 364,253 7.04%
Risk-Free Rate 2.51% Risk-Free Rate Weight of Equity
Marekt Risk Premium 5.00% 2.51% 97.3%
Beta 93.00% + X 6.96%
Cost of Equity 7.16% Beta Cost of Equity
Average Weight of Equity 97.25% 0.93 7.16%
x
Market Value of Preferred Stock 0 Equity Risk Premium
Cost of Preferred Stock 0 5.00%
Market Value of Firm 374,551
WACC 7.04%
Weighted
Cost of
Debt
Weighted
Cost of
Equity

Google
Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E CV
Advertising Revenues:
Google Websites 31,221 37,422 45,085 51,848 59,625 66,780 74,793 83,769 92,146 101,360 105,617
Google Network Members' websites 12,465 13,125 13,971 16,067 18,477 20,694 23,177 25,958 28,554 31,410 32,729
Total Advertising Revenues 43,686 50,547 59,056 67,914 78,102 87,474 97,971 109,727 120,700 132,770 138,346
Other Revenues 2,353 4,972 6,945 7,987 9,185 10,287 11,521 12,904 14,194 15,614 16,270
Total Googe Revenues 46,039 55,519 66,001 75,901 87,286 97,761 109,492 122,631 134,894 148,384 154,616
Motorola Mobile:
Total Motoral Mobile revenues 4,136 4,306 5,486
Total Revenues 50,175 59,825 71,487 75,901 87,286 97,761 109,492 122,631 134,894 148,384 154,616
Advertising Revenues:
Google Websites 68% 67% 68% 68% 68% 68% 68% 68% 68% 68% 68%
Google Network Members' websites 27% 24% 21% 21% 21% 21% 21% 21% 21% 21% 21%
Total Advertising Revenues 95% 91% 89% 89% 89% 89% 89% 89% 89% 89% 89%
Other Revenues 5% 9% 10.52% 10.52% 10.52% 10.52% 10.52% 10.52% 10.52% 10.52% 10.52%
Total Googe Revenues 100% 100% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Google
Income Statement
(In millions )
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Sales 49,958 59,730 65,830 75,901 87,286 97,761 109,492 122,631 134,894 148,384 154,616
COGS excluding D&A 17,543 21,885 7,215 26,565 30,550 34,216 38,322 42,921 47,213 51,934 54,115
Depreciation 1,988 2,781 3,523 5,135 5,875 6,756 7,567 8,475 9,492 10,441 11,485
Amortization of Intangibles 974 1,158 1,078 1,152 864 648 583 408 286 200 163
Gross Income 29,453 33,906 54,014 43,049 49,998 56,141 63,020 70,827 77,904 85,808 88,852
SG&A Expense
Research & Development 6,593 7,910 9,832 11,385 13,093 14,664 16,424 19,621 21,583 23,741 23,965
Other SG&A 9,741 12,002 13,982 17,078 19,639 21,996 24,636 27,592 30,351 33,386 34,789
EBIT (Operating Income) 13,119 13,994 30,200 14,586 17,265 19,480 21,961 23,614 25,970 28,681 30,098
Nonoperating Income - Net 791 500 1,089 1,100 1,125 1,150 1,176 1,202 1,229 1,257 1,285
Other Income (Expense) 78 (285) 343
Interest Expense 84 83 111 573 615 701 793 884 990 1,097 1,203
Unusual Expense - Net 440 (85) 13,919 - - - - - - - -
Pretax Income 13,386 14,496 17,259 12,913 15,525 17,629 19,992 21,528 23,751 26,327 27,610
Income Taxes 2,598 2,282 3,331 4,175 4,801 5,377 6,022 7,358 8,094 8,903 10,050
Consolidated Net Income 10,788 12,214 13,928 8,739 10,725 12,252 13,969 14,170 15,657 17,424 17,560
Net Income 10,788 12,214 13,928 8,739 10,725 12,252 13,969 14,170 15,657 17,424 17,560
EPS (recurring) 16.71 17.95 34.45 25.87 31.50 35.89 40.82 41.31 45.53 50.55 50.82
Total Shares Outstanding 659.11 671.02 680.17 682 684 685 687 689 690 692 694
Dividends/Share $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Google
Balance Sheet (In Millions)
Balance Sheet
Assets - - - - - - - -
Cash and Cash Equivalents 14,778 18,898 18,347 24,161 31,950 41,825 52,520 62,998 75,451 88,751 114,112
Marketable Securities (Short-term investments) 33,310 39,819 46,048 47,079 48,134 49,212 50,315 51,442 52,594 53,772 54,977
Accounts Receivable, Net 8,585 9,390 11,556 13,283 15,275 17,108 19,161 21,460 23,606 25,967 25,512
Inventories 505 426 - 425 489 547 613 687 755 831 866
Other Current Assets 3,276 4,353 4,734 5,503 6,328 7,088 7,938 8,891 9,780 10,758 11,210
Total Current Assets 60,454 72,886 80,685 90,451 102,176 115,781 130,547 145,477 162,187 180,079 206,676
Net Property, Plant & Equipment 11,854 16,524 23,883 27,324 31,423 35,194 39,417 44,147 48,562 53,418 49,477
Total Investments and Advances 1,469 1,976 3,079 3,148 3,218 3,291 3,364 3,440 3,517 3,595 3,676
Long-Term Note Receivable - - 1,325 - - - - - - - -
Net Goodwill 10,537 11,492 15,599 15,599 15,599 15,599 15,599 15,599 15,599 15,599 15,599
Net Other Intangibles 7,473 6,066 4,607 3,455 2,591 1,944 1,361 952 667 467 303
Deferred Tax Assets - - - 215 247 276 310 378 416 458 517
Other Assets 2,011 1,976 1,955 2,002 2,051 2,100 2,151 2,203 2,257 2,311 2,367
Total Assets 93,798 110,920 131,133 142,194 157,306 174,185 192,749 212,197 233,203 255,927 278,615
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt 2,549 3,009 2,009 461 493 528 565 604 647 692 740
Accounts Payable 2,012 2,453 1,715 1,973 2,269 2,542 2,847 3,188 3,507 3,858 4,020
Income Taxes Payable 240 24 96 125 144 161 211 258 283 312 402
Other Current Liabilities 9,536 10,422 12,985 16,162 18,634 21,430 24,001 26,881 30,107 33,118 36,430
Total Current Liabilities 14,337 15,908 16,805 18,722 21,541 24,661 27,624 30,932 34,544 37,979 41,592
Long-Term Debt 2,988 2,236 3,228 3,454 3,696 3,954 4,231 4,527 4,844 5,183 5,546
Deferred Tax Liabilities 1,872 1,947 1,971 1,362 1,566 1,754 1,965 2,401 2,641 2,905 3,279
Other Liabilities (excl. Deferred Income) 2,786 3,381 4,525 4,934 5,674 6,354 7,117 7,971 8,768 9,645 10,050
Deferred Income 100 139 104 121 140 156 175 196 216 237 247
Total Liabilities 22,083 23,611 26,633 28,593 32,617 36,880 41,112 46,027 51,014 55,950 60,715
Common Stock 22,835 25,922 28,767 29,130 29,493 29,856 30,219 30,582 30,945 31,308 31,671
Retained Earnings 48,342 61,262 75,706 84,445 95,169 107,421 121,391 135,561 151,218 168,642 186,202
Cumulative Translation Adjustment/Unrealized For. Exch. Gain (66) 75 (394) (394) (394) (394) (394) (394) (394) (394) (394)
Unrealized Gain/Loss Marketable Securities 604 50 421 421 421 421 421 421 421 421 421
Total Equity 71,715 87,309 104,500 113,602 124,689 137,304 151,637 166,170 182,190 199,977 217,900
Total Liabilities & Shareholders' Equity 93,798 110,920 131,133 142,194 157,306 174,185 192,749 212,197 233,203 255,927 278,615

Google
Historical Cash Flow Statement
(In Millions)
Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014
Cash Flow
Operating Activities
Net Income / Starting Line 6,520 8,505 9,737 10,737 12,920 14,444
Depreciation and Depletion 1,240 1,067 1,396 1,988 2,781 3,523
Amortization of Intangible Assets 284 329 455 974 1,158 1,078
Deferred Taxes & Investment Tax Credit (268) 9 343 (266) (437) (104)
Other Funds 1,054 1,270 2,004 2,288 2,268 3,071
Receivables (504) (1,129) (1,156) (787) (1,307) (1,641)
Inventories -- -- -- 301 (234) --
Accounts Payable 34 272 101 (499) 605 436
Income Taxes Payable -- -- -- 1,492 401 --
Other Accruals 243 745 795 762 967 1,002
Other Assets/Liabilities 713 13 890 (371) (463) 567
Net Operating Cash Flow 9,316 11,081 14,565 16,619 18,659 22,376
Investing Activities
Capital Expenditures (810) (4,018) (3,438) (3,273) (7,358) (10,959)
Net Assets from Acquisitions (108) (1,067) (1,900) (10,568) (1,448) --
Sale of Fixed Assets & Businesses -- -- -- -- 2,525 386
Purchase/Sale of Investments (7,101) (7,956) (13,349) 1,119 (7,699) (6,997)
Other Funds - 2,361 (354) (334) 301 (3,485)
Net Investing Cash Flow (8,019) (10,680) (19,041) (13,056) (13,679) (21,055)
Financing Activities
Change in Capital Stock - (801) - - - -
Issuance/Reduction of Debt, Net - 3,463 726 1,328 (557) (18)
Other Funds 233 388 81 (99) (300) (1,421)
Net Financing Cash Flow 233 3,050 807 1,229 (857) (1,439)
Net Change in Cash 1,530 3,451 (3,669) 4,792 4,123 (118)
Beginning Balance 8,656 10,198 13,630 9,983 14,778 18,898
Ending Balance 10,198 13,630 9,983 14,778 18,898 18,347
1,542 3,432 (3,647) 4,795 4,120 (551)

Google
Projected Cash Flow Statement
(In Millions)
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Cash Flow
Operating Activities
Net Income / Starting Line 8,739 10,725 12,252 13,969 14,170 15,657 17,424 17,560
Add: Depreciation and Depletion 5,135 5,875 6,756 7,567 8,475 9,492 10,441 11,485
Add: Amortization of Intangible Assets 1,152 864 648 583 408 286 200 163
Deferred Taxes (823) 172 158 177 367 202 222 315
Other Funds (marketable securities) (1,031) (1,055) (1,078) (1,102) (1,127) (1,152) (1,178) (1,204)
Receivables (1,727) (1,992) (1,833) (2,053) (2,299) (2,146) (2,361) 456
Inventories (425) (64) (59) (66) (74) (69) (76) (35)
Other Current Assets (769) (825) (759) (851) (953) (889) (978) (452)
Accounts Payable 258 296 272 305 342 319 351 162
Income Taxes Payable 29 19 17 49 47 26 28 90
Other Current Liabilities 3,177 2,473 2,795 2,572 2,880 3,226 3,011 3,312
Deferred Income 17 18 17 19 21 20 22 10
Other Liabilities 409 740 681 763 854 797 877 405
Net Operating Cash Flow 14,140 17,245 19,867 21,932 23,111 25,768 27,983 32,267
Investing Activities
Capital Expenditures (8,576) (9,973) (10,527) (11,790) (13,205) (13,906) (15,297) (7,544)
Other Assets (47) (48) (50) (51) (52) (53) (55) (56)
Gross Intangibles - - - - - - - -
Note Receivable 1,325 - - - - - - -
Purchase/Sale of Investments (69) (71) (72) (74) (75) (77) (79) (81)
Net Investing Cash Flow (7,368) (10,092) (10,648) (11,914) (13,332) (14,037) (15,430) (7,680)
Financing Activities
Change in Capital Stock 363 363 363 363 363 363 363 363
Issuance/Reduction of Debt, Net (1,322) 274 293 314 336 359 384 411
Other Funds
Net Financing Cash Flow (959) 637 656 677 699 722 747 774
Net Change in Cash 5,814 7,789 9,875 10,695 10,478 12,453 13,300 25,361
Beginning Balance 18,347 24,161 31,950 41,825 52,520 62,998 75,451 88,751
Ending Balance 24,161 31,950 41,825 52,520 62,998 75,451 88,751 114,112

Google
Common Size Balance Sheet
Balance Sheet
Assets
Cash and Cash Equivalents 29.58% 31.64% 27.87% 31.83% 36.60% 42.78% 47.97% 51.37% 55.93% 59.81% 73.80%
Marketable Securities (Short Term Investments) 66.68% 66.66% 69.95% 62.03% 55.15% 50.34% 45.95% 41.95% 38.99% 36.24% 35.56%
Short-Term Receivables, Net 17.18% 15.72% 17.55% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 16.50%
Inventories 1.01% 0.71% 0.00% 0.56% 0.56% 0.56% 0.56% 0.56% 0.56% 0.56% 0.56%
Other Current Assets 6.56% 7.29% 7.19% 7.25% 7.25% 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
Total Current Assets 121.01% 122.03% 122.57% 119.17% 117.06% 118.43% 119.23% 118.63% 120.23% 121.36% 133.67%
Net Property, Plant & Equipment 23.73% 27.66% 36.28% 36.00% 36.00% 36.00% 36.00% 36.00% 36.00% 36.00% 32.00%
Gross Property, Plant & Equipment 35.42% 39.91% 49.74% 54.44% 58.77% 63.24% 67.23% 70.80% 74.67% 78.19% 79.92%
Accumulated Depreciation 11.70% 12.24% 13.46% 18.44% 22.77% 27.24% 31.23% 34.80% 38.67% 42.19% 47.92%
Total Investments and Advances 2.94% 3.31% 4.68% 4.15% 3.69% 3.37% 3.07% 2.80% 2.61% 2.42% 2.38%
Long-Term Note Receivable 0.00% 0.00% 2.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.01% 0.00%
Net Goodwill 9.69% 8.10% 7.35% 6.38% 5.54% 4.95% 4.42% 3.95% 3.59% 3.26% 3.13%
Net Other Intangibles 2.00% 1.67% 1.51% 1.31% 1.14% 1.02% 0.91% 0.81% 0.74% 0.67% 0.64%
Deferred Tax Assets 0.00% 0.00% 0.00% 5.14% 5.14% 5.14% 5.14% 5.14% 5.14% 5.14% 5.14%
Other Assets 4.03% 3.31% 2.97% 2.64% 2.35% 2.15% 1.96% 1.80% 1.67% 1.56% 1.53%
Total Assets 187.75% 185.70% 199.20% 174.78% 170.92% 171.06% 170.74% 169.13% 169.98% 172.42% 178.49%
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt 5.10% 5.04% 3.05% 0.61% 0.57% 0.54% 0.52% 0.49% 0.48% 0.47% 0.48%
Accounts Payable 4.03% 4.11% 2.61% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60%
Income Taxes Payable (As a % of income tax expense) 9.24% 1.05% 2.88% 3.00% 3.00% 3.00% 3.50% 3.50% 3.50% 3.50% 4.00%
Other Current Liabilities 19.09% 17.45% 19.73% 21.29% 21.35% 21.92% 21.92% 21.92% 22.32% 22.32% 23.56%
Total Current Liabilities 28.70% 26.63% 25.53% 27.50% 27.51% 28.06% 28.54% 28.51% 28.90% 28.89% 30.64%
Long-Term Debt (As a % of beginning Non-cash assets) 10.69% 4.89% 6.18% 5.18% 5.21% 5.12% 5.09% 5.04% 4.96% 4.93% 4.89%
Deferred Tax Liabilities 72.06% 85.32% 59.17% 32.63% 32.63% 32.63% 32.63% 32.63% 32.63% 32.63% 32.63%
Other Liabilities (excl. Deferred Income) 5.58% 5.66% 6.87% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
Deferred Income 0.20% 0.23% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16%
Total Liabilities 44.20% 39.53% 40.46% 71.97% 72.01% 72.47% 72.92% 72.84% 73.14% 73.10% 74.82%
Common Stock 45.71% 43.40% 43.70% 38.38% 33.79% 30.54% 27.60% 24.94% 22.94% 21.10% 20.48%
Retained Earnings 96.77% 102.56% 115.00% 111.26% 109.03% 109.88% 110.87% 110.54% 112.10% 113.65% 120.43%
Cumulative Translation Adjustment/Unrealized For. Exch. Gain -0.13% 0.13% -0.60% -0.52% -0.45% -0.40% -0.36% -0.32% -0.29% -0.27% -0.25%
Unrealized Gain/Loss Marketable Securities 1.21% 0.08% 0.64% 0.55% 0.48% 0.43% 0.38% 0.34% 0.31% 0.28% 0.27%
Total Equity 143.55% 146.17% 158.74% 149.67% 142.85% 140.45% 138.49% 135.50% 135.06% 134.77% 140.93%
Total Liabilities & Shareholders' Equity 187.75% 185.70% 199.20% 99.47% 99.53% 100.53% 101.45% 101.35% 102.04% 101.99% 105.46%

Google
Common Size Income Statement
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
COGS excluding D&A 35.12% 36.64% 10.96% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
Depreciation (As a % of Sales) 3.98% 4.66% 5.35% 6.77% 6.73% 6.91% 6.91% 6.91% 7.04% 7.04% 7.43%
Amortization of Intangibles (As a % of Sales) 1.95% 1.94% 1.64% 1.52% 0.99% 0.66% 0.53% 0.33% 0.21% 0.13% 0.11%
Gross Income 58.96% 56.77% 82.05% 56.72% 57.28% 57.43% 57.56% 57.76% 57.75% 57.83% 57.47%
Research & Development 13.20% 13.24% 14.94% 15.00% 15.00% 15.00% 15.00% 16.00% 16.00% 16.00% 15.50%
Other SG&A 19.50% 20.09% 21.24% 22.50% 22.50% 22.50% 22.50% 22.50% 22.50% 22.50% 22.50%
EBIT (Operating Income) 26.26% 23.43% 45.88% 19.22% 19.78% 19.93% 20.06% 19.26% 19.25% 19.33% 19.47%
Nonoperating Income (As a % of Sales) 1.58% 0.84% 1.65% 1.45% 1.29% 1.18% 1.07% 0.98% 0.91% 0.85% 0.83%
Interest Expense (As a % of Sales) 0.17% 0.14% 0.17% 0.75% 0.70% 0.72% 0.72% 0.72% 0.73% 0.74% 0.78%
Unusual Expense - Net 0.88% -0.14% 21.14% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Pretax Income 26.79% 24.27% 26.22% 17.01% 17.79% 18.03% 18.26% 17.56% 17.61% 17.74% 17.86%
Income Taxes 5.20% 3.82% 5.06% 5.50% 5.50% 5.50% 5.50% 6.00% 6.00% 6.00% 6.50%
Consolidated Net Income 21.59% 20.45% 21.16% 11.51% 12.29% 12.53% 12.76% 11.56% 11.61% 11.74% 11.36%
Net Income 21.59% 20.45% 21.16% 11.51% 12.29% 12.53% 12.76% 11.56% 11.61% 11.74% 11.36%

Google
Value Driver Estimation
NOPLAT
EBITA:
Net Sales 49,958 59,730 65,830 75,901 87,286 97,761 109,492 122,631 134,894 148,384 154,616
Cost of Goods Sold 17,543 21,885 7,215 26,565 30,550 34,216 38,322 42,921 47,213 51,934 54,115
Depreciation 1,988 2,781 3,523 5,135 5,875 6,756 7,567 8,475 9,492 10,441 11,485
Amortization of Intangibles 974 1,158 1,078 1,152 864 648 583 408 286 200 163
Selling, General, and Administrative 9,741 12,002 13,982 17,078 19,639 21,996 24,636 27,592 30,351 33,386 34,789
Research and Development 6,593 7,910 9,832 11,385 13,093 14,664 16,424 19,621 21,583 23,741 23,965
Add: Implied Interest on Operating leases 47 59 65 140 160 185 207 231 259 285 314
EBITA 13,166 14,053 30,265 14,726 17,426 19,665 22,167 23,846 26,229 28,966 30,412
Adjusted Taxes:
Total Provisions from Income Taxes 2,916 2,552 3,331 4,175 4,801 5,377 6,022 7,358 8,094 8,903 10,050
Add: Tax shield on interest expense 32 32 43 220 237 270 305 340 381 422 463
Less: Tax on nonoperating income 305 193 419 424 433 443 453 463 473 484 495
Add: Tax shield on unusual expense 169 (33) 5,359 - - - - - - - -
Add: Tax shield on operating lease 18 23 25 54 62 71 80 89 100 110 121
Total Adjusted Taxes 2,831 2,381 8,338 4,025 4,666 5,275 5,954 7,324 8,101 8,951 10,139
Add: Increase (decrease) in deferred tax liability 1,872 1,947 1,971 1,148 1,320 1,478 1,655 2,023 2,225 2,447 2,763
NOPLAT 12,206 13,618 23,898 11,849 14,079 15,868 17,869 18,544 20,353 22,462 23,035
Invested Capital
Operating Current Assets:
Normal Cash 999 1,195 1,317 1,518 1,746 1,955 2,190 2,453 2,698 2,968 3,092
Accounts Receivable 8,585 9,390 11,556 13,283 15,275 17,108 19,161 21,460 23,606 25,967 25,512
Inventory 505 426 - 425 489 547 613 687 755 831 866
Other Current Assets 3,276 4,353 4,734 5,503 6,328 7,088 7,938 8,891 9,780 10,758 11,210
Total Operating Current Assets 13,365 15,364 17,607 20,729 23,838 26,698 29,902 33,491 36,840 40,524 40,679
Non-Interest Bearing Current Liabilities:
Accounts Payable 2,012 2,453 1,715 1,973 2,269 2,542 2,847 3,188 3,507 3,858 4,020
Income Taxes Payable 240 24 96 125 144 161 211 258 283 312 402
Deferred Income 100 139 104 121 140 156 175 196 216 237 247
Other Current Liabilities 9,536 10,422 12,985 16,162 18,634 21,430 24,001 26,881 30,107 33,118 36,430
Total Non-Interest Bearing Current Liabilities 11,888 13,038 14,900 18,382 21,188 24,289 27,234 30,523 34,113 37,525 41,099
Add: Net PPE 11,854 16,524 23,883 27,324 31,423 35,194 39,417 44,147 48,562 53,418 49,477
Total Operating working Capital 13,331 18,850 26,590 29,671 34,073 37,603 42,085 47,114 51,288 56,417 49,057
Net other operating Assets:
Capitalized PV of operating leases 2,730 3,028 4,514 6,524 7,464 8,584 9,614 10,767 12,059 13,265 14,592
Net other Intangibles 7,473 6,066 4,607 3,455 2,591 1,944 1,361 952 667 467 303
Other Assets 2,011 1,976 1,955 2,002 2,051 2,100 2,151 2,203 2,257 2,311 2,367
Net other operating Assets 12,214 11,070 11,076 11,982 12,106 12,628 13,125 13,923 14,983 16,043 17,262
Net Other Operating Liabilities
Other Liabilities 2,786 3,381 4,525 4,934 5,674 6,354 7,117 7,971 8,768 9,645 10,050
Deferred Income 100 139 104 121 140 156 175 196 216 237 247
Total Other Operaing Liabilities 2,886 3,520 4,629 5,055 5,813 6,511 7,292 8,167 8,984 9,882 10,297
Invested Capital 22,660 26,399 33,036 36,598 40,366 43,720 47,919 52,870 57,287 62,578 56,022
NOPLAT 12,206 13,618 23,898 11,849 14,079 15,868 17,869 18,544 20,353 22,462 23,035
NOPLAT 12,206.49 13,618.37 23,897.75 11,848.73 14,079.33 15,868.00 17,868.57 18,544.19 20,352.65 22,462.29 23,035.29
/Beginning Invested Capital 12,757.34 22,659.53 26,399.27 33,036.37 36,597.53 40,366.37 43,719.92 47,918.68 52,869.96 57,286.73 62,577.69
ROIC 95.68% 60.10% 90.52% 35.87% 38.47% 39.31% 40.87% 38.70% 38.50% 39.21% 36.81%
Gross Cash Flow
NOPLAT 12,206.49 13,618.37 23,897.75 11,848.73 14,079.33 15,868.00 17,868.57 18,544.19 20,352.65 22,462.29 23,035.29
+ Depreciation 1,988.00 2,781.00 3,523.00 5,134.85 5,874.75 6,755.96 7,566.68 8,474.68 9,491.64 10,440.80 11,484.88
Gross Cash Flow 14,194.49 16,399.37 27,420.75 16,983.57 19,954.08 22,623.96 25,435.25 27,018.87 29,844.29 32,903.10 34,520.17
Less: Gross Investment
Net Investment 9,902.19 3,739.74 6,637.10 3,561.16 3,768.83 3,353.56 4,198.76 4,951.28 4,416.77 5,290.96 (6,555.33)
Depreciation 1,988.00 2,781.00 3,523.00 5,134.85 5,874.75 6,755.96 7,566.68 8,474.68 9,491.64 10,440.80 11,484.88
Gross Investment 11,890.19 6,520.74 10,160.10 8,696.01 9,643.58 10,109.52 11,765.44 13,425.96 13,908.41 15,731.77 4,929.55
FCF 2,304 9,879 17,261 8,288 10,310 12,514 13,670 13,593 15,936 17,171 29,591
NOPLAT 12,206 13,618 23,898 11,849 14,079 15,868 17,869 18,544 20,353 22,462 23,035
Less: (Beginning Invested Capital) * (WACC) 856 1,520 1,771 2,216 2,454 2,707 2,932 3,214 3,546 3,842 4,197
EP 11,351 12,099 22,127 9,633 11,625 13,161 14,936 15,330 16,807 18,620 18,838

Google
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
(In Millions)
Key Inputs:
CV Growth 3.20%
CV ROIC 37.91%
WACC 7.04%
Cost of Equity 7.16%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E CV
DCF Model
FCF 8,054 10,208 12,392 13,560 13,470 15,799 17,046 549,861
PV FCF 7,525 8,910 10,105 10,330 9,586 10,504 10,588 341,540
Value from Operations 409,088
Plus: Value of Non-Operating Assets
Excess Cash 17,030
Marketable Securities and ST Investments 46,048
Tax Loss Carryforwards 954
Discontinued Operations 104
Total Non-Operating Assets 64,136
Less: Non-Equity Claims
Total Debt (N/P, ST, LT, ST of LT) 10,298
PV of (ESOP) 2,498
Total Non-Equity Claims 12,796
Value of Equity 460,428
Shares Outstanding (Currently) 681
Intrinsic Price of Stock $676.48
Fraction of Fiscal Year Elapsed 0.29
Adjusted Intrinsic Price of Stock $682.76
EP Model
EP 9,495 11,459 12,976 14,733 15,106 16,558 18,348 485,675
PV EP 8,871 10,002 10,581 11,223 10,751 11,009 11,397 301,672
Value from Operations 409,088
Plus: Value of Non-Operating Assets
Excess Cash 17,030
Marketable Securities and ST Investments 46,048
Tax Loss Carryforwards 954
Discontinued Operations 104
Total Non-Operating Assets 64,136
Less: Non-Equity Claims
Total Debt (N/P, ST, LT, ST of LT) 10,298
PV of (ESOP) 2,498
Total Non-Equity Claims 12,796
Value of Equity 460,428
Shares Outstanding (Currently) 681
Intrinsic Price of Stock $676.48
Fraction of Fiscal Year Elapsed 0.29
Adjusted Intrinsic Price of Stock $682.76

Google
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
EPS 25.87$ 31.50$ 35.89$ 40.82$ 41.31$ 45.53$ 50.55$ 50.82$
Key Assumptions
CV growth 3.20%
CV ROE 12.92%
Cost of Equity 7.16%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Dividends Per Share 23.70 27.00 30.71 31.08 34.25 38.03 38.23 965.41
Number of Periods to discount 1 2 3 4 5 6 7 7
Discounted Cash Flows $22.11 $23.52 $24.96 $23.57 $24.24 $25.11 $23.56 $594.95
Intrinsic Value 762.02$
Fraction of Year Elapsed 29.32%
Adjusted Stock Price $777.63

Google As of 4/17/2015
Relative Valuation Models
EPS EPS Est. 5yr
Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16
AAPL Apple Inc. $124.75 $6.45 $8.68 19.3 14.4 13.18 1.47 1.09
FB Facebook $80.78 $1.77 $1.96 45.6 41.2 28.57 1.60 1.44
AKAM Akamai Technologies $71.90 $2.43 $2.64 29.6 27.2 15.50 1.91 1.76
MSFT Microsoft Corporation $41.62 $2.63 $2.39 15.8 17.4 7.95 1.99 2.19
VRSN VeriSign, Inc. $66.06 $2.72 $3.13 24.3 21.1 12.00 2.02 1.76
EBAY eBay Inc. $55.79 $2.95 $3.10 18.9 18.0 9.81 1.93 1.83
Average 25.6 23.2 0.9 0.4
GOOG Google $535.53 $25.87 $31.50 20.7 17.0 1.57 13.2 10.8
Implied Value:
Relative P/E (EPS15) $ 662.22
Relative P/E (EPS16) 731.43$
PEG Ratio (EPS15) 36.62$
PEG Ratio (EPS16) 17.97$

Google
Key Management Ratios
Liquidity Ratios
Current Ratio Current Assets/Current Liabilities 4.22 4.58 4.80 4.83 4.74 4.69 4.73 4.70 4.70 4.74 4.97
Cash Ratio Cash/Current Liabilities 3.35 3.69 3.83 3.81 3.72 3.69 3.72 3.70 3.71 3.75 4.07
Quick Ratio (CA - Inventory - Prepaid Exp.)/CL 3.95 4.28 4.52 4.51 4.43 4.39 4.42 4.39 4.39 4.44 4.68
Activity or Asset-Management Ratios
Avg Total Assets (Beg. Total Assets + End. Total Assets)/2 83186 102359 121026.5 136663.713 149750.202 165745.245 183466.56 202472.783 222700.146 244565.209 267270.989
Total Asset Turnover Net Sales/Total Assets 60.06% 58.35% 54.39% 55.54% 58.29% 58.98% 59.68% 60.57% 60.57% 60.67% 57.85%
Financial Leverage Ratios
Debt-to-equity Ratio Total Debt/Total Equity 0.24 0.20 0.18 0.13 0.14 0.15 0.16 0.17 0.18 0.19 0.20
Debt Ratio Toal Debt/Total Assets 0.24 0.21 0.20 0.20 0.21 0.21 0.21 0.22 0.22 0.22 0.22
Capitalization Ratio Long Term Debt/(Long Term Debt + Equity) 0.12 0.08 0.10 0.11 0.11 0.12 0.12 0.13 0.14 0.14 0.15
Profitability Ratios
Net Profit Margin (EBITA/Net Sales) (EBITA/Net Sales) 26.36% 23.54% 45.99% 19.42% 19.99% 20.14% 20.27% 19.47% 19.47% 19.54% 19.69%
Return on Assets Net Income/Average Total Assets 15.83% 13.74% 25.01% 10.79% 11.65% 11.88% 12.10% 11.79% 11.79% 11.86% 11.39%
Return on Investment EBITA/(Debt + Equity) 50.99% 49.93% 94.62% 45.25% 52.56% 58.23% 64.42% 68.00% 73.38% 79.47% 81.82%
Return on Equity Net Income/Average Total Equity 18.36% 16.10% 28.97% 12.98% 13.99% 14.34% 14.64% 14.37% 14.41% 14.50% 13.97%
Payout Ratios
Dividend Payout Ratio Dividends/Net Income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Pre-Tax Cost
of Debt
WACC
7.04% 2.21% 2.71% 3.21% 3.71% 4.21% 4.71% 5.21%
5.16% 5.06% 5.07% 5.08% 5.09% 5.11% 5.12% 5.13%
5.66% 5.55% 5.56% 5.57% 5.58% 5.59% 5.60% 5.61%
6.16% 6.03% 6.04% 6.06% 6.07% 6.08% 6.09% 6.10%
6.66% 6.52% 6.53% 6.54% 6.55% 6.56% 6.58% 6.59%
Cost of Equity 7.16% 7.00% 7.02% 7.03% 7.04% 7.05% 7.06% 7.07%
7.66% 7.49% 7.50% 7.51% 7.53% 7.54% 7.55% 7.56%
8.16% 7.97% 7.99% 8.00% 8.01% 8.02% 8.04% 8.05%
8.66% 8.46% 8.47% 8.49% 8.50% 8.51% 8.52% 8.53%
9.16% 8.95% 8.96% 8.97% 8.98% 9.00% 9.01% 9.02%
Beta
$682.76 0.861 0.884 0.907 0.93 0.953 0.976 0.999
3.50% $1,143.44 $1,105.97 $1,070.95 $1,038.14 $1,007.34 $978.38 $951.09
4.00% $968.70 $938.27 $909.76 $882.99 $857.81 $834.09 $811.70
4.50% $841.54 $815.98 $791.99 $769.43 $748.18 $728.13 $709.18
Equity Risk Premium 5.00% $744.91 $722.90 $702.22 $682.76 $664.40 $647.07 $630.67
5.50% $669.01 $649.72 $631.57 $614.47 $598.34 $583.08 $568.64
6.00% $607.86 $590.70 $574.54 $559.31 $544.93 $531.33 $518.44
6.50% $557.55 $542.11 $527.57 $513.85 $500.88 $488.62 $476.99
CV Growth Rate
682.76$ 1.70% 2.20% 2.70% 3.20% 3.70% 4.20% 4.70%
5.54% $762.34 $841.28 $947.88 $1,099.89 $1,334.34 $1,743.54 $2,639.69
6.04% $676.62 $734.65 $809.95 $911.64 $1,056.65 $1,280.28 $1,670.60
6.54% $608.80 $652.79 $708.14 $779.97 $876.96 $1,015.27 $1,228.57
WACC 7.04% $553.84 $588.00 $629.96 $682.76 $751.26 $843.77 $975.67
7.54% $508.43 $535.49 $568.08 $608.10 $658.45 $723.78 $811.99
8.04% $470.30 $492.10 $517.91 $548.99 $587.15 $635.16 $697.46
8.54% $437.86 $455.66 $476.44 $501.06 $530.69 $567.08 $612.86
SG&A
682.76$ 19.50% 20.50% 21.50% 22.50% 23.50% 24.50% 25.50%
29.00% $1,093.41 $1,047.77 $1,002.12 $956.48 $910.85 $865.22 $819.59
31.00% $1,002.12 $956.48 $910.85 $865.22 $819.59 $773.97 $728.36
33.00% $910.85 $865.22 $819.59 $773.97 $728.36 $682.76 $637.17
COGS as % of Sales 35.00% $819.59 $773.97 $728.36 $682.76 $637.17 $591.59 $546.03
37.00% $728.36 $682.76 $637.17 $591.59 $546.03 $500.49 $454.98
39.00% $637.17 $591.59 $546.03 $500.49 $454.98 $409.50 $364.07
41.00% $546.03 $500.49 $454.98 $409.50 $364.07 $318.72 $273.46

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
(In millions)
Number of Options Outstanding (shares): 7
Average Time to Maturity (years): 4.30
Expected Annual Number of Options Exercised: 2
Current Average Strike Price: 215.56$
Cost of Equity: 6.83%
Current Stock Price: $535.53
2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Increase in Shares Outstanding: 2 2 2 2 2 2 2 2
Average Strike Price: 215.56$ 215.56$ 215.56$ 215.56$ 215.56$ 215.56$ 215.56$ 215.56$
Increase in Common Stock Account: 363 363 363 363 363 363 363 363
Change in Treasury Stock 0 0 0 0 0 0 0 0
Expected Price of Repurchased Shares: 535.53$ 572.08$ 611.13$ 652.84$ 697.39$ 744.99$ 795.84$ 850.16$
Number of Shares Repurchased: - - - - - - - -
Shares Outstanding (beginning of the year) 680 682 684 685 687 689 690 692
Plus: Shares Issued Through ESOP 2 2 2 2 2 2 2 2
Less: Shares Repurchased in Treasury - - - - - - - -
Shares Outstanding (end of the year) 682 684 685 687 689 690 692 694

VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol GOOG
Current Stock Price $535.53
Risk Free Rate 2.51%
Current Dividend Yield 0.00%
Annualized St. Dev. of Stock Returns 28.21%
Average Average B-S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares (Mil) Price Life (yrs) Price Granted
Range 1 7.24 215.56 4.30 345.04$ 2,498$
Total 7 215.56$ 4.30 345.04$ 2,498$

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating Operating
Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases
2015 598 2014 499 2013 466
2016 622 2015 477 2014 453
2017 634 2016 438 2015 417
2018 596 2017 418 2016 362
2019 576 2018 370 2017 326
Thereafter 3157 Thereafter 1836 Thereafter 1595
Total Minimum Payments 6183 Total Minimum Payments 4038 Total Minimum Payments 3619
Less: Interest 1122 Less: Interest 676 Less: Interest 594
PV of Minimum Payments 5061 PV of Minimum Payments 3362 PV of Minimum Payments 3025
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 3.71% Pre-Tax Cost of Debt 3.71% Pre-Tax Cost of Debt 3.71%
Number Years Implied by Year 6 Payment 5.5 Number Years Implied by Year 6 Payment 5.0 Number Years Implied by Year 6 Payment 4.9
Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 598 576.6 1 499 481.2 1 466 449.3
2 622 578.3 2 477 443.5 2 453 421.2
3 634 568.4 3 438 392.7 3 417 373.9
4 596 515.2 4 418 361.3 4 362 312.9
5 576 480.1 5 370 308.4 5 326 271.7
6 & beyond 576 2342.5 6 & beyond 370 1374.8 6 & beyond 326 1195.8
PV of Minimum Payments 5061.1 PV of Minimum Payments 3361.9 PV of Minimum Payments 3024.9

GOOG_VALUATION

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