Case Study: Valuing Google Using the SOTP Method

1. Introduction

There are many ways to evaluate a company’s value, but one method gaining attention recently is the SOTP (Sum of the Parts) approach. This valuation technique breaks down a company into its individual business segments, evaluates each independently, and then adds them up to determine the company’s overall value. It’s particularly well-suited for diversified tech giants like Google (Alphabet), which operates across a wide range of business areas.

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2. Overview of the SOTP Method

Unlike traditional valuation methods that assess a company as a single unit, the SOTP approach values each business division separately. This enables more accurate analysis of each segment’s growth potential and allows investors to uncover hidden value. Key advantages include:

• Granular analysis: Assessing each segment based on its unique profitability and growth trajectory
• Better investment decisions: Identifying undervalued segments to uncover potential opportunities
• Competitive insights: Comparing divisions to build targeted strategic plans

Compared to traditional methods like PER (Price-to-Earnings Ratio) or DCF (Discounted Cash Flow), the SOTP method is especially effective for multi-segment companies with varied growth profiles.

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3. Breakdown of Google’s Business Segments

Alphabet operates a wide range of businesses, including search and advertising, cloud computing, hardware, and media content. The major segments can be summarized as:

1. Search and Advertising (Google Search, Display Ads, YouTube Ads)
   • Core business generating over 70% of total revenue
   • Dominant market share through its search engine and ad network
2. Cloud (Google Cloud Platform)
   • Rapidly expanding in competition with AWS and Azure
   • Growth fueled by demand for AI and data analytics
3. YouTube and Media Content
   • A global leader in video streaming with strong user engagement
   • Revenue driven by YouTube Premium and ad-based monetization
4. Other Bets (Waymo, Verily, etc.)
   • Emerging sectors like autonomous driving and health tech
   • High potential for future value creation

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4. Applying SOTP to Google’s Business Segments

To assess the value of each segment, we analyze their revenue models, growth rates, market positions, and competitive environments, then apply suitable valuation techniques:

• Search & Advertising:

  Evaluated using the EV/EBITDA multiple, reflecting strong profitability and steady cash flows

• Cloud:

  Valued using a Price-to-Sales Ratio (PSR), benchmarked against AWS and Azure to account for growth potential

• YouTube:

  Compared to streaming and digital media peers like Netflix, using profitability-based multiples

• Other Bets:

  Valued using recent venture capital fundraising rounds, given limited monetization and early-stage development

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5. Valuation Results and Analysis

Based on the SOTP framework, the estimated valuation for each segment is as follows:

• Search & Advertising: $1.0 trillion
• Cloud: $300 billion
• YouTube: $200 billion
• Other Bets: $50 billion

Summing these values, Google’s total enterprise value is estimated at $1.55 trillion. This suggests potential undervaluation compared to current market prices. Given the growth trajectories of its Cloud business and Other Bets, there is further upside potential in Google’s valuation.

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6. Investment Insights from SOTP

Based on the SOTP assessment, several investment insights can be drawn:

• Long-term growth prospects: Continued expansion in Cloud and AI will drive value
• Sustained competitive advantage: Google retains a dominant position in the search and ad market
• Undervalued segments: Future value from emerging businesses may not be fully priced in

By evaluating the company on a segment-by-segment basis, investors can better understand which parts of Google offer the most strategic value for portfolio construction.

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7. Conclusion and Takeaways

SOTP-based valuation of Google provides a powerful framework for understanding the full value of each business unit. With the stable profitability of its Search and Advertising operations, and the growth potential of Cloud and Other Bets, Google remains a compelling long-term investment.

That said, the SOTP method has limitations. Some segments may be difficult to value precisely due to limited data, and external market conditions can significantly impact segment assumptions. Therefore, investors should complement SOTP with ongoing monitoring of industry trends and company performance.