Google (GOOG) has been dominating tech as of late. The search engine giant's shares are up almost 30 percent over the last year, and with Google continuing to break new ground and reach company highs in almost every one of its financial metrics, the sky is the limit. In this article, I explain why Google shares may be the next tech giant hot stock.
From a valuation standpoint, there is still plenty of meat left on the bone for Google shareholders. Despite a seemingly high P/E ratio of 24.35, the company's strong expected growth and leading positions in several major growth markets give shares plenty of room for price appreciation. Google has a December 2013 forward P/E ratio of 17.4 and a 2014 forward P/E of 14.8. These are fairly low multiples considering analyst expectations of 13.7 percent annual earnings growth over the next five years. If Google can continue its current trend of innovation over the next year, it is reasonable to believe that shares can eclipse the $1000 mark. This will be achieved if Google meets its 2013 earnings expectations and keeps its P/E ratio at 22 or higher. Google is in a very good position to make this happen.
Google's current market position compares to that of a pre-surge Apple (AAPL). First, Google has a dominant position in a lot of big markets. Android has about a 75 percent market share in the smartphone market, and about a 67 percent market share in the search engine market. Second, Google is vertically positioning itself to resemble Apple's business plan. A few years ago, Apple was the only company to have a significant market share in both consumer electronics and operating systems. With the acquisition of Motorola Mobility and the announcement of the Chromebook Pixel, Google has succeeded in vertically integrating its product line. Microsoft (MSFT) is also trying to adopt this strategy, but Google's stronger brand and better track record of successful entries into new markets suggests that Google will ultimately be more successful.
Unlike Apple, Google's revenue streams are not too dependent on any one product, which lowers the risk of owning Google stock. At Apple's peak, about 75 percent of Apple's revenue was derived from iPad and iPhone sales. As we have seen from Apple's monster share price drop, a company's dependence on 2 core products can be very risky. With a worse than expected iPhone 5 launch, Apple shares took a huge hit. Google investors are less likely to face this problem since the company's revenue comes from a variety of different sources. In its Q4 earnings presentation, Google states that only 67 percent of its revenue (excluding Motorola Mobility) comes from Google-owned sites. This includes its search engine, YouTube, Google Maps, Google Plus, and a plethora of other successful websites. In fact, 8 of the world's 30 most visited websites are owned by Google. This is a much more diversified position than that of Apple. 27 percent of Google's revenue comes from its partner sites, and the remaining 6 percent is contained in an "Other" category that has grown over 100 percent in the last year. These percentages do not account for Motorola Mobility, which accounted for 10.5 percent of Google's total fourth quarter revenue. All of these different revenue streams suggest that the company is not too dependent on any one product.
In conclusion, I believe that Google is a very strong buy because of its high growth potential, low valuation, and broad product line. Of the 38 analysts with reported recommendations on Yahoo Finance, 25 rate Google as a "Buy" or "Strong Buy," and none of them rate GOOG as "Underperform" or "Sell." The company has proven its ability to enter large markets, and its aggressive entry into hardware coupled with its dominance in the smartphone OS space give it a lot of potential for high levels of revenue and earnings growth. I currently give Google shares a one year target price of $925, and I would not be surprised if Google shares reach the $1000 mark within the next year. These high valuation targets are achievable with Google's combination of a high expected earnings per share, coupled with the innovation and high growth necessary to keep its P/E ratio above 20. Google is expected to grow its revenue from $50.2 billion to $61 billion in 2013, and should eclipse the $70 billion revenue mark in 2014. Since analysts do not expect Google's margins to increase until 2014, a high P/E ratio over the next year will still be justified since Google will have plenty of earnings growth to look forward to. As a result, Google can see large share price gains despite already being a tech giant.