No. of Recommendations: 23
Rather than looking at the multiple of sales, I like to look at the trend of a few of the moving parts separately.
For example, the trend of real sales growth per share has been 17.2%/year 2013-2023(est).
That includes a slightly above-trend starting year and a slightly below-trend ending year, so at least the slope is a conservative one for creating a trend.
Let's say we pencil in inflation + 15%/year for the next few years. I'm an optimist to that extent.
But because the future is uncertain, maybe a gradual slowdown after a while, say growth of inflation + 9% at year 10???
(that 9% figure plucked from a place where the sun does not shine--it is the biggest wild card in this exercise)
Pre-tax profit margin (excluding "extraordinary" items) was in the narrow range 25.1% - 26.7% in the stretch 2014-2020 inclusive.
2021 was unusually good, 2022 was (slightly)unusually bad at 24.6%.
I think one could probably pencil in 25% as "normal" for a while yet.
For tax rates, pencil in whatever you like. But the last three years were fairly steady around the average 16.1%.
The 16.2% of 2020 and 2021 is the highest in the stretch 2017 to (estimated) 2023, so there doesn't seem to be a need to pencil in a higher number, so let's say 16.1%.
Putting all those together, you can create a projection of real earnings per share into the future.
Modify assumptions to suit.
Then it's only a matter of what multiple of trend earnings per share the market might assign.
For conservatism, there is no company I am sufficiently optimistic of, AND sufficiently confident of my projections for, that I would assume a multiple over 20 as far out as 5-10 years from now.
So I usually pencil in 19 as a "terminal" multiple around that time frame, for even the most rapidly growing and powerful firms.
Putting those things together, you can create a table of future revenues, pretax profits, net profits, and future prices in today's dollars.
It sounds like a bad idea to pile to many assumptions on top of each other, but actually I think it makes it easier to see which assumptions seem plausible.
Anyway, here is a possible future table, starting from today with the GOOGL price at about $122 and CPI at 305.11.
Note that the rates of return are after inflation.
So, a projection of 10% in the table with inflation at 4% would mean you're expecting a nominal return of 14%.
years year real sales real pretax pretax tax net multiple real real
forward ending growth sales margin profit rate profit assumed price cagr
0.5 2023 $24.44 25% $6.11 16.1% $5.13 25.0 $128 11.9%
1.5 2024 16% 28.35 25% 7.09 16.1% 5.95 24.4 145 12.8%
2.5 2025 15% 32.61 25% 8.15 16.1% 6.84 23.8 163 12.5%
3.5 2026 15% 37.50 25% 9.37 16.1% 7.86 23.2 182 12.4%
4.5 2027 15% 43.12 25% 10.78 16.1% 9.04 22.6 204 12.3%
5.5 2028 14% 49.16 25% 12.29 16.1% 10.31 22.0 227 12.1%
6.5 2029 13% 55.55 25% 13.89 16.1% 11.65 21.4 249 11.7%
7.5 2030 12% 62.21 25% 15.55 16.1% 13.05 20.8 271 11.3%
8.5 2031 11% 69.06 25% 17.26 16.1% 14.48 20.2 293 10.9%
9.5 2032 10% 75.96 25% 18.99 16.1% 15.93 19.6 312 10.5%
10.5 2033 9% 82.80 25% 20.70 16.1% 17.37 19.0 330 10.0%
Obviously these numbers will be off, some of them by a mile.
But I think it's a good way to lay out your thinking.
That being said, I think the assumptions are (just) robust enough that a pretty good forward return is pretty likely from here.
If these projections were by chance to be in the right ballpark, a price in the high $160s would be "fair", because it would indicate a return of around inflation + 6.5%/year for a holding period in the 5-10 year range.
A price of $200ish today would not offer an attractive outlook.
Offhand I don't think I'll be closing any of my positions before the next time we see fresh all time highs.
Unless the news, as it comes in, causes me to question materially some of those pencilled-in assumptions.
Jim
