Is Google's Goose Cooked? 11 comments
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You know Google (GOOG) is in trouble when it shifts from its accustomed mode of growing its business, to one focused on saving nickels and dimes. It is amusing when the almighty Google (which earlier said it was insulated from the impact of a poor economy) goes on a cost cutting kick, with the likes of trimming employee meals and taking its annual Xmas party down a few notches, possibly from the grand ballroom at The Ritz, to the banquet room at the local Holiday Inn. GOOG recently announced it will be reducing the number of its "contract workers" (it has 20,123 full time employees and 10,000 contract workers), but failed to mention specifics. The grand question is, will this action be enough to save GOOG from missing some pretty lofty earnings estimates?
2009 estimates are too high: Earnings estimates of $22.30 are too optimistic (this represents a 14% growth rate from 2008 earnings estimates of $19.46) and more than likely, do not reflect the full impact of what the toxic economy has bestowed upon us. Consumers are simply not buying, hence they are not "searching" with the same vigor they were before the bomb was dropped. The economy is in horrible shape, and could get worse before it gets better. It could ultimately make the Great Depression look like a tea party.
This "once in a century" firestorm is bound to have a dampening effect on search engine marketing, translating into inferior key word prices and click through rates on online ads. Don't get me wrong, I am not the "gloom and doom" type, I am just trying to be realistic. You just have to go with the flow and not try to fight it. Why not jump on the short side to help make up for some of your losses! This downside cycle of the economy will eventually pass, and in the meantime, some of the greatest equity buying opportunities of "all time" are emerging.
The search leader is still too pricey: Although the shares have seen a nice 20% bounce from their 52 week lows, the rally was more a result of technical factors than a change in fundamentals. The stock had simply dropped too much in too short of a time, prompting the cavalry to arrive (bargain hunters and shorts, covering to book profits) and rescue the "longs". The rally will likely be short lived, as a retest of its 52 week lows is probably in the cards. If GOOG fails to find support near the $245 area, it could plunge as low as $200, as year end tax selling exacerbates the severity of the fall. GOOG's forward PE of 13 is rich compared to Microsoft's (MSFT) PE of 10 and Cisco's (CSCO) forward PE of 11. GOOG's forward PE should be lower than both of these tech mammoths, because MSFT and CSCO are safer investments, since their management provides earnings guidance, something GOOG refuses to do. This lack of guidance certainly makes GOOG's quarterly earnings reports not for the "faint of heart".
Recommendation: GOOG is still a great company, but it is simply too expensive for a company whose growth rate has lost its "mojo". If you are determined to hold GOOG shares long, at least hedge yourself by selling covered calls. If you are looking for an adrenaline rush, you might consider opening a short position. Although the shares dropping to the $200 vicinity is quite a reach (stranger things have happened), it would certainly provide an outstanding price point to cover and go long (the stock would then be a real bargain). In the short term, the trend is still down, so the stock's recent advance has created a shorting opportunity for those wanting to go short, without having to chase the shares lower. I would be inclined to place a "stop buy to cover" order to trigger near the $310 area, enabling you to limit your risk in the event the trade goes "horribly" against you.
Disclosure: Short GOOG.
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This article has 11 comments:
Nice to see a writer who isn't on Google's dwindling payroll.
And as far as GOOG's 2009 estimates being too high...you could say that about practically every company in the S&P 500 and definitely every tech company. Estimates will continue to come down across the board.
This analysis reads more like a childish rant. Google has been cutting costs (and saying so publicly) for two quarters. Why isn't this understood as prudent rather than a sign of doom?
1) You don't look at the EV - which you should.
-Google does however look more expensive on 2009 EV/EBITDA.
2) You're not looking at growth rates. Analyst are estimating far higher growth rates for GOOG than for MSFT. This may justify a higher EV/EBITDA for Google.
One may also disagree with your claim that MSFT is 'safer'. MSFT business model is vastly anchored in software + services, while GOOG is a pure play services model where all your apps are online and readily available. Which one of these approaches are most 'safe' going forward I leave to everyone to evaluate themselves.
This company is in it for the long run and is making vary careful analysese, followed by appropriate actions so that misinformed journalists think twice before writing slander.
Please take some time to study long-term growth rate on stock valuation and company prudence before commenting.
In a super bear market like the current one, I won't be surprised to see best companies trading below 8 times trailing earnings and mediocre ones trading below liquidation value.
Reports of GOOG's demise are absurd, unless you believe GOOG is about to be displaced by the latest in the MSFT/YHOO debacle.
ROFLMAO!
^__^
..
Google's had its drop, IMO. (Mark, this is your second bad short-call--your first being AAPL a week or two ago. I'll repeat what I said then: Be sure to set stop-losses.)
for the want ads?