Six Reasons To Stick With Google

12/23/2013


  Recent Price
$1,070
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
25
  Shares (millions)
339
  Long-Term Debt as % of Capital
3%
  52-Week Price Range
$1,092.37 - $695.52

Google ($1,070; GOOG) shares have gained 51% so far this year, easily outpacing the 33% average return for S&P 1500 technology stocks and leaving investors to wonder if the stock has any room left to run.

The bearish case is fairly obvious. In the wake of the rally, Google trades at 25 times trailing earnings, an 8% premium to its five-year average. Google's Value score has fallen to 29, weighing on its Overall score, which has dipped to 78.

Google's advertising revenues have also been somewhat disappointing in recent quarters. Meanwhile, its hardware unit, Motorola Mobility, remains unprofitable and continues to report declining sales. Google clings to a 90% share of the search market in the European Union but may have to loosen its grip after rivals slammed its proposed settlement to antitrust concerns raised by the EU.

Yet we rate Google as a Focus List Buy and a Long-Term Buy, for the following reasons:

• Google holds a commanding 67% share of the U.S. search market, according to researcher comScore. Microsoft ($37; MSFT) stands in a distant second place with an 18% slice. Although desktop-search revenue has stagnated, advertising for queries conducted on tablets and smartphones continues to soar. YouTube has also helped drive ad growth and could generate 8% to 10% of Google's total sales this year, analysts estimate.

• The Winter Olympics and World Cup soccer tournament should accelerate advertising growth next year. Some experts see global spending on advertising rising about 5% in 2014, with online ads potentially surging 15%.

• Google seems to view the mobile explosion as a way to expand its core business: digital advertising. The company sells its Moto G smartphone at an operating profit margin of less than 5%, analysts estimate, while rivals generate margins of 20% or higher. Google undercuts other device makers while increasing the number of screens in consumers' palms. To Google, smartphones and tablets are vehicles to deliver digital ads on more screens.

• The stock's valuation seems more reasonable considering its projected growth trajectory. Google is expected to earn $49.64 per share in the 12 months ending September 2014, implying 17% growth — well ahead of the average 7% growth projected for internet software and services stocks. At less than 22 times projected earnings, the stock trades at an 18% discount to its peer-group average. Google shares also trade at 1.5 times its projected annual earnings growth rate over the next five years, in line with sector norms.

• Google is one of just two companies in the S&P 500 Index to increase annual cash from operations by double digits in each of the past 10 years. Google is on pace to extend that streak this year.

• With Google Glass barely out of the cradle, management is already on the prowl for its next "moonshot." Earlier this month, Google acquired Boston Dynamics, a company that builds robots capable of climbing trees and running up to 29 miles per hour. Google has acquired eight robotics companies in the past six months.

An annual report for Google Inc. is available at 1600 Amphitheatre Parkway, Mountain View, CA 94043; (650) 253-0000; investor.google.com.

GOOG
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '13
10.74
vs.
8.87
12%
928.00
-
845.56
23 - 21
Jun '13
9.56
vs.
10.16
19%
920.60
-
761.26
22 - 18
Mar '13
11.58
vs.
10.08
31%
844.00
-
695.52
21 - 17
Dec '12
10.65
vs.
9.50
36%
774.38
-
636.00
20 - 16
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
50.18
39.88
0.00
774.38
-
556.52
19 - 14
2011
37.91
36.04
0.00
646.76
-
473.02
18 - 13
2010
29.32
29.60
0.00
630.85
-
433.63
21 - 15
2009
23.65
23.20
0.00
625.99
-
282.75
27 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
78
77
29
95
93
64
84

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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