Google: A Gorilla Not to Be Missed

After a long period during which I did not make any changes to my portfolio, tracked at "Globes", I am using the funds received from the sale of Omrix Biopharmaceuticals Ltd. (Nasdaq:OMRI) to Johnson and Johnson (NYSE: JNJ) to strengthen my portfolio with online search giant Google (Nasdaq: GOOG).

Omrix, which will soon be delisted and become a unit of Johnson and Johnson, was the only share which yielded a positive return for me in 2008, rising nearly 60% since I added it in April. Over the coming weeks I will seek a new investment in the healthcare sector, because a check of returns for 2008 shows that there were several large and profitable biotech companies, such as Celgene (Nasdaq: CELG) or Gilead Sciences (Nasdaq:GILD), which had positive returns.

Google shares have fallen from around $700 at the beginning of the year to $300 today, a drop of 57%, much more than the average drop in technology companies. In my mind, this more than reflects investor expectations of a slowing in Google's growth rate due to the recession.

Of the overall marketing pie, the online slice is still small, is constantly growing, is far from saturation, will quickly turn profitable when the recession ends and Google is the undisputed leader in the segment.

The online advertising world today gets only about 10% of overall corporate advertising spending. 26% goes to newspapers, 12% to magazines, and the most 38% - to television, despite the fact that an increasing number of consumers watch video over the Internet.

Google has a wide area in which to grow in the coming years, and also has a good chance to change YouTube from a site with sky high ratings, to a site that also makes a lot of money.

Other potential markets that can help Google over the coming years are cellular-based advertising and the ability to access broadband Internet virtually anywhere.

Like many other gorillas in the technology sector, analysts have recently lowered profit forecasts for Google several times, and today the average earnings per share estimate for 2009 is around $21, with estimated annual revenue of $18 billion. These figures represent a profit multiple of 14, which may be justified in light of the low growth that is expected in Google's business over the upcoming year.

However, looking several years ahead, with an expected jump in growth after the recession, my humble opinion is that this multiple is low, and the price multiple of 5 is not as high as when Google began being publicly traded.

This is a good opportunity to invest in one of today's most successful technology companies, which is also professionally managed by a manager CEO Dr. Eric Schmidt - who was not one of the founders. Google is recommended only for investors who have an investment time frame of more than the upcoming year - which is still shrouded in fog, because of the big downshift by consumers around the world, and because the company does not issue guidance.

There very well may be a better opportunity next month when results are published. Yet I would not count on that because, in general, the expectations for the upcoming earnings season are very low regarding the rest of the market.

Economic turning points usually come as surprises, and when it happens, shares like Apple (Nasdaq: AAPL), Google, or Research in Motion (Nasdaq: RIMM) will be among the first to rise in response.

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[PeakOiler:]

GOOG won't be matching your 60% return on OMRI so here's a suggestion: MS on Toronto. BioMS (MS = multiple sclerosis) has a patented and apparently very effective, safe drug for later stage MS, now in Phase III. Lilly (LLY) has injected $100M, with more to come, into the company, and the top drug analysts in Canada are expecting a buyout by Lilly at a huge premium to the $320 CDN market cap.

Added bonus: currency diversification.

2008 Dec 31 09:23 AM

[User 283977:]

I question a GOOG play at this point in time.

S&P thinks the 12 month target price for GOOG is $500. That means they think GOOG is going to return to the price it held before equities collapsed in October of this year. Given the economic conditions of today, I say hog wash. It may go up, but no way back to $500 in the next twelve months.

GOOG is currently at 310 and it has been oscillating within two standard deviations of its $300 support level for months. Before I pulled the trigger on GOOG, I would want to have some evidence that upward movement was occurring as opposed to chance oscillation around the current support level (mean). Buying GOOG within its current range of normal price variability seems speculative.

If GOOG hits $326, that would be the signal to buy with a target of $350. Why $326, because that is within two standard deviations of the next support level at $350. Once GOOG hits the next support level it is likely to stay there for some time.

An alternative play would be to purchase 7 shares of BP at 45 for each share of GOOG you were thinking of buying at 310. This would give you a relatively risk free return of 7.5% on the dividend. if you held that for one year and reinvested the quarterly returns, you would make a very similar return to the next support level constrained GOOG play.

The advantage is it would be relatively risk free. As an additional bonus, BP could increase above $45 in the next year. If it increased, the BP play could provide a better return over the GOOG play where the high end is constrained at the next support level. Of course, both GOOG and BP could go down. In that event, you still have that 7.5% BP dividend from a company with 1.5 times the market cap as GOOG. A company that sells something of intrinsic value as opposed to selling advertising exposures.

In a bear market, I think the best play is to make a decent return on your capital while you wait for conditions to improve. It all depends on your tolerance to certain kinds of risk. I am working some risky plays, but the payoff on those plays are not dependent on having a sudden market turnaround occurring.

I am Long on BP. I purchased GOOG on its way down. However, I recently sold GOOG because my investment dollars were just sitting there. When it did nothing for a certain period of time, it became a looser relative to the BP play. That was the trigger for the sale. I lost money, but I will make it up.

I do think GOOG is a good long term play. Where I differ is at what point the purchase should be made. I would like to see evidence of upward movement before pulling the trigger and tying up large amounts of my capital in a stock that provides no dividend.

2008 Dec 31 02:41 PM

[Shawinski:]

A recent Globe and Mail article supports this view on MS;TSX: 'Eye on Equities: Stocks that should be on your radar screen' - www.theglobeandmail.co.../


On Dec 31 09:23 AM PeakOiler wrote:

> GOOG won't be matching your 60% return on OMRI so here's a suggestion:
> MS on Toronto. BioMS (MS = multiple sclerosis) has a patented and
> apparently very effective, safe drug for later stage MS, now in Phase
> III. Lilly (seekingalpha.com/symbo...) has injected $100M,
> with more to come, into the company, and the top drug analysts in
> Canada are expecting a buyout by Lilly at a huge premium to the $320
> CDN market cap.
>
> Added bonus: currency diversification.

Mar 01 03:53 AM