Ever since Google's (NASDAQ: GOOG) August 2004 IPO, there has been a group of professional and individual investors who just never quite got the story. The "so-called" experts have been pooh-poohing this company for the last $450. Now, they will all take that sweated-for victory lap and happily exclaim "see, I told ya". Yeah, you told us at $120 it was too expensive, and at $200 ... and $300 ... and $400 and $500 and of course at $550...
Now that the company has a slight blemish on its spectacular run of 12 consecutive up quarters, these investors that have missed this unparalleled story, can now finally get in. Google is a buy.
Growth companies will inevitably trip up along the way. The question is did Google hit the wall or a slight speed bump? The latter. Google over-hired during the quarter, a total of 1,548 new Googlites. It also spent -up to buy and add more content to its already vast database. Nice problem to have as these are correctable and one time events. The biggest point is the business grew massively year-over-year with revenues up 58% to $3.87 billion.
The core search engine business is as intact as ever and the other ancillary businesses are smoking as well. The Google management team has always indicated that they will manage this company first and foremost and not be slaves to Wall Street's quarterly expectations. Perhaps they will learn the lesson of the happy medium: be more clear in their overall guidance and the Street shall follow you almost anywhere. Probably not going to happen as this team beats to its own drum.
The overriding fact is the story is NOT broken, but very, very slightly dented. Google showed its vulnerable side. The stock is indicated down $40, or about $12 billion of market value. The Street will over react at first, but Google will recover.
I estimate this company will earn $15.25 per share this year ending December 2007 and $20 per share for December 2008. If Google sits around the $500 price tag, that's a 25 price earnings multiple for 2008. Yes, the stock is cheap. With annual revenue growth sustainable at 40%+,earnings growth at 30-35%+, and the operating margins at 50%+, this stock should trade at a 35 price earnings multiple, or $700.
Google IS the franchise player--period. Sure the "perfection" of the story is gone for the moment and Wall Street will punish the stock on a near-term basis. The short interest is low at about 3% of the float, so a short-covering rally is not in the cards. But analysts and savvy investors will let the dust settle and let the fast money players who just got torched move out of the way, then begin to buy the stock.
If you have any kind of investment time horizon longer than a quarter -- Google is a buy -- plain and simple.
Georges Yared is the CIO of Yared Investment Research
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Reader Comments (Page 1 of 1)
7-20-2007 @ 8:54AM
ray gordon said...
GOOG's problems run much deeper than a "one time expense."
The lawsuits are taking their toll as Google faces increasing liability, and an inability to continue profiting from content it does not own or license. As others figure out their business model and copy it, their market dominance will erode, and Google's profits are all attributable to only one aspect of their business.
The company was priced to perfection, a perfection that was missed, and while it may remain profitable, that doesn't mean it's worth $500 a share. Even $300 a share is optimistic given the downside. Valuations based on rosy projections are what fueled the last internet bubble, and with Google's insider options beginning to vest on August 18, 2007, a lot of the original talent will be able to jump ship or divest their holdings if they choose. Insider selling in this company has been high for quite some time.
The political backlash against Google is going to be even stronger, as more and more people wind up "Googlebombed" or defamed by people who deliberately target the search engines as tools.
What it all adds up to is that this stock was driven up by people who have been blind to the risks, and now the stock has begun to fall to earth before the real problems begin to even take hold in investor consciousness. I'm sure there is a lot of money to be made trading this stock, but there are other companies that are much more solid investments and which still have an upside, such as ebay.
7-20-2007 @ 9:25AM
Teddy said...
It's about time that someone with a little back bone stood up for a great company. Thank you!!!!!
7-20-2007 @ 10:20AM
linda said...
Why is it that people who don't own Google only see the negative. The reason for the shortfall is the spent money on buying other companies--who the hell ever said anyting about the lawsuits?
For once a blogger who have a very positive attitude about Google.
7-20-2007 @ 10:46AM
BhhStudios said...
Unrelated, the new site layout sucks, Please return to what it was yesterday.