With one of the most respected company names in the world and almost three-quarters of Wall Street analysts rating the company a ‘buy,’ Google (NASDAQ:GOOG) is hardly a diamond in the rough. Shares have climbed 51 percent in the past year; however, do Google’s earnings and growth potential justify such a high price? Let’s use our CHEAT SHEET investing framework to decide whether Google is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
C = Catalysts for the Stock’s Movement
Despite Google Glass, self-driving cars, and all of the other cutting-edge products in Google’s pipeline, its core business operation is still its search engine. Its cash cow is advertising revenue from searches, which generates around 95 percent of its profits. Googles’s greatest growth prospect in the coming years is online mobile advertising. The company is strongly positioned to capitalize on two key trends in the coming years: the increased use of mobile internet search in emerging markets and innovations in advertising that will generate higher ‘per click’ margins. With an already-dominant market share, Google is right where it needs to be to take advantage of a growing user base and higher margins in mobile advertising. Should You Be Feeling Lucky About
Then there’s Google’s recent acquisition of Waze for $1 billion. While Waze’s profitability is unlikely to be impactful enough to shift valuations, the acquisition tells investors one thing: Google is committed to preserving and expanding its ecosystem. The tech giant already has strong positions with Gmail, Chrome, and its search engine. By acquiring this crowd-sourcing technology, Google Maps will be able to incorporate real-time traffic updates—a definite competitive advantage over its peers.
E = Earnings and Revenues Are Increasing
Google has demonstrated strong earnings per share growth in all but one of the last five quarters. Additionally, Google’s revenues have grown year-over-year for the past five quarters. Quarterly earnings per share rose 13.6 percent from the previous year’s quarter to $9.94. The increase came mainly from Google’s advertising revenue, which generates almost all of the company’s profits. Google-owned sites produce 67 percent of this revenue. This quarter, these sites netted revenues of $8.64 billion, up 18 percent from the previous year’s quarter. ‘Aggregate paid clicks,’ an important profitability metric for Google, were up 20 percent from the first quarter of last year.
|2013 Q1||2012 Q4||2012 Q3||2012 Q2||2012 Q1|
|EPS YoY Growth||13.60%||17.06%||-21.61%||9.64%||58.80%|
|Revenue YoY Growth||31.23%||24.87%||45.07%||35.32%||24.14%|
T = Technicals Are Strong
Google is currently trading at around $882, above both its 200-day moving average of $807.24 and its 50-day moving average of $882.26. The share price has traded in between $900 and $850 since retracing from its 52-week high of $920.60. The company is up an impressive 51 percent in the last year. With the price moving sideways over the past month, Google is showing resistance at around $900 and support at around $850. Investors should keep a close eye out—breaking through either of those numbers could indicate a developing uptrend or downtrend.
With a low forward price to earnings multiple of 16.58, Google is not that expensive relative to the rest of the blue chips on the S&P 500, despite its reputation. Also, when you have earnings and growth potential like Google, a higher price to earnings multiple is not necessarily a bad thing. In fact, a low multiple should raise eyebrows and suggest something wrong with the company. Google has a wealth of growth prospects with online mobile advertising, cutting-edge projects in the pipeline, and an impressive suite of applications that make up its ecosystem. Moreover, despite an uncertain near-term economic environment, Google has around $45 billion in cash equivalents, which it could use for share repurchases if things get rocky in the economy. With some of the best minds in the country and an R&D budget to match, Google still has plenty of room to innovate and grow. Google is an OUTPERFORM.
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