By Matt Doiron
Google Inc (GOOG) beat Wall Street expectations when it reported the results for the fourth quarter of 2012. Earnings per share were $8.62, which was a higher figure than the $8.22 in the fourth quarter of the previous year, the $6.53 Google had earned in the previous quarter, and 2% higher (once we adjust for GAAP versus non GAAP) than the Street consensus. For the full year of 2012, Google reported $32.31 in diluted earnings per share, up from $29.76 in 2011. The stock rose to about $738 in after hours trading, which yields a trailing P/E of 23 (using GAAP figures).
The core Google business increased its gross income by 15% in the fourth quarter of 2012 compared to the same period in 2011, based on revenue growth of 22% (and 12% on a q/q basis). This growth rate was high enough that despite Motorola Mobility Holdings being unprofitable- or at least that looks to be the case if we assign a share of the increases in operating costs to that business unit- earnings were actually up 7%. Net income had been lower in Q3 2012 than a year earlier as a result of the acquisition of Motorola Mobility, and we'd had some concerns about Google's ability to integrate the business.
The stock now trades at about 16 times (non GAAP) analyst consensus for 2013, based on an expected 15% increase in earnings per share. Note that this would be consistent with the core Google growth rate holding steady and the Motorola business improving enough that it did not dramatically decrease total earnings. From that point the stock would be undervalued if it continued to show double-digit growth rates; the primary question is whether or not Google can get enough of a combination of core business growth and Motorola integration to hit its targets.
Google had been one of the most popular stocks among hedge funds in the third quarter of 2012, with 132 funds and other notable investors in our database of 13F filings reporting a position. This made it second only to Apple. See the full top ten list. Billionaire Stephen Mandel's Lone Pine Capital cut its stake but still owned 1.1 million shares, and this made Google that fund's second largest holding by market value (find more of Mandel's favorite stocks). Tiger Global Management- which, like Lone Pine, is a Tiger Cub fund- owned about 700,000 shares of Google at the end of September (check out Tiger Global's stock picks).
Google's peers include Yahoo! Inc. (YHOO), Research In Motion Limited (RIMM), Microsoft Corporation (MSFT), and Baidu.com (BIDU). Analyst expectations are actually that Research in Motion will not be profitable in the fiscal year ending March 2014, but the stock has stormed up 100% in the last three months as the market has become more optimistic that the new BlackBerry 10 will revitalize the company (revenue and earnings have been very poor as customers switch to Apple or Android smartphones). Microsoft, which along with Google and Apple has a status as a "pan-technology" company, trades at 9 times forward earnings estimates but that figure may be deflated due to temporarily higher earnings from the rollout of new versions in Windows and Office. In addition Windows 8 reviews are looking mixed and so we would wait for information about how sales are doing- among both consumers and enterprise customers- before considering buying.
Baidu and Yahoo have 2013 earnings multiples in the 17-18 range, so actually a premium to where Google trades. In the case of Yahoo this is particularly troubling: revenue growth was flat in the third quarter of 2012 versus a year earlier, and we certainly think it has a poorer brand than Google. As a result we would avoid that stock. Baidu has been reporting strong growth figures, and in that case we think that the company has been punished for its associations with China (many Chinese companies have released fraudulent financials, and the market is becoming more wary of the economy). The five-year PEG ratio is 0.7 as analysts are optimistic about Baidu, and it may be worth taking a closer look there.
The market reaction to Google's numbers makes sense: the financial performance has been good, and it's certainly a relief to see positive earnings growth from a year ago. It's not quite enough to make the stock a strong buy, however; the valuation is still counting on a good 2013. We are watching Google very closely.