Empire Google is more than doubled since the March lows, but lately over the last couple of weeks the stock seems to have hit a wall. This stock has been stalled…I say, Google, look out $600. You ain’t seen nothing yet. Pictures are worth a thousand words and $750.” — CNBC’s Mad Money 12/15/2009
Jim Cramer often does a segment called “Off the Charts” where he dissects a stock from both a fundamental and technical perspective, and on Tuesday’s show this segment featured Google (GOOG). From a technical perspective, Cramer said that the technician he trusts claims this chart is the best in the book. The stock is showing higher highs and lower lows, and looks to be headed higher, potentially much higher.
Looking at the fundamentals Cramer believes that the analysts are too negative on Google, as the most bullish among them has a $700 price target. With those same analysts calling for fiscal 2010 earnings per share of $26.37, it assumes a multiple will stay just about in line with the current fiscal year at 26.5x. For Cramer, that simply underestimates Google’s growth potential as the world’s undisputed online search advertising leader. Although Google still dominates that industry, they are actively diversifying their business lines in recent years and are moving into uncharted territory, such as mobile phones and television advertising data (TiVO and Google Are Watching Your Remote). With exposure to everything from search and web services to mobile Internet and browsers, Google is about as diverse a Technology company as exists today.
The latest search data from Comscore shows Google has fortified its market share lead with nearly 70% of queries, after an initial surge from Microsoft’s (MSFT) Bing. It would be hard to deny that even with the difficulties in advertising during the recession, online advertising is a slice of the pie that is growing rapidly. Yet, as Cramer pointed out online advertising only accounts for 12% of all advertising dollars these days. The growing success of Cyber Monday sales following Thanksgiving through sites like Amazon (AMZN) is a sign of things to come as more and more people transact on the web.
At Ockham, we see big things for the future of Google as well, but the current valuation only receives a neutral Fairly Valued rating at present. The company shows impressive growth (both organic and through savvy acquisitions) and ability to generate profits, but the steady march upward over the past year has made the stock less attractive to a value investor. This is easily demonstrated through comparing Google against itself historically. Since becoming a public company, the market has been willing to pay between 26x and 51x cash earnings per share for GOOG, and while the current level is on the low end of the range at 29x, it is still considered normal valuation in our methodology. It is a similar situation with price-to-sales per share metrics. The current level of 8.3x is on the low end of the historical range of 7.3x to 14.9x.
Google is currently within its historically normal valuation ranges, yet if it were able to achieve the midpoint of these ranges it would imply a price for GOOG of $790. Google is still growing rapidly but may not be able to command the same premium from the market as it did as a less mature company. Clearly, we are still optimistic about Google’s long term prospects just like Cramer; however, this not news to the market and there are plenty of cheaper stocks.