Is Google a Great Buy Now?

Google’s (GOOG) stock fell decidedly below the psychologically significant mark of $300 per share Tuesday. The stock has fallen 60% overall from its high near $720 and sits near its 2004-2005 prices. Despite this, Google remains a global leader in search, internet advertising, and has its finger on the pulse of innovative web services. The bull cases for Google, which I’ve written about several times (Google’s earnings power and Google’s search share), remain intact in the long run. Does that mean the shares necessarily imply a great risk-reward tradeoff now?

For perspective, let’s take a look at Google’s performance and its stock performance over a similar period.

Special thanks to GridStone Research for the graph and data

Overall, Google’s stock grew at a 93% CAGR from its IPO in 2004 until 2007. Even including the precipitous drop in 2008, the stock has grown at a 30% CAGR. Since 2003, Google has grown its revenue at a 72.6% CAGR and its net income at a 109.1% CAGR. Roughly normalizing to the 2004-2008 time period, Google’s revenue and net income have grown at 62% and 80% CAGR, respectively.

It’s clear that Google’s stock grew relatively in line with its net income; in fact, even at its peak, Google’s stock growth never outpaced its net income growth rate, thus implying that wild multiple expansion was not responsible for investor returns over the last five years.

Unfortunately, with the changing economic outlook, the market seems to be preemptively punishing Google for slowing growth. If the current share price holds, the implication is that the Company will not grow net income from 2008 levels for another three years, assuming that a stock’s return (30% CAGR, today) trends towards the long-term growth rate of a company.

This return scenario seems compelling for a long term investor, given that we remain dependent on growth for our returns as opposed to any fundamental valuation. It’s hard to ascertain whether or not the stock current price represents a reasonable entry point.

Unfortunately, Google’s stock chart does not seem overly compelling today, after a bullish cross through its 50-day moving average and up towards its 200-day moving average, an important development for a reversal. In the area marked, it is interesting to note that all short term indicators were overwhelmingly positive just before Google’s swift and violent correction over the last month. The stock has failed its downside test for 50-day support. Further, the very short term uptrend has all but been violated and it seems a test of its 52-week closing low of $257.44 may be likely. For those with a long term perspective looking for an opportunistic entry into Google’s stock, you may be better off on the sidelines for the time being. But probably not for long. Keep an eye out for a strong bounce off the stock’s lows, that will mark your best near term entry point.

Full Disclosure: Author is long shares of GOOG at the time of writing.

Comments

[Sperry8:]

Doesn't anyone find it funny that Google's price fell below $300 for the first time in a LONG time yesterday - and that yesterday's end of day price was also the strike price used to re-price options for Google employees who are willing to add 1 yr to their vesting? Amazing how the strike price on March 9 was the 2009 low... and today its up almost 6%. Magic eh? I think not.

Mar 10 12:19 PM

[Mark Bern:]

I am late in warming up to Google. But maybe that's not such a bad thing. Buying at this level certainly seems more prudent to me than having bought near the peak.

The more I learn about this company, the more I like for the long term. They keep finding new markets to enter and in each new market they find ways to be more efficient and a better value than legacy industry competitors such as print media and ad agencies. They will enable the Internet to compete in markets and methods we haven't yet conceived. And the markets they are already attacking are huge providing abundant growth opportunities well into the future. The conversion process of brick and mortar to digital has just begun.

I think my kids will thank me in twenty years if I buy Google today.

Mar 10 01:06 PM

[LA Tech:]

The best days of GOOG stock are located in the REAR view mirror!

This stock will NEVER get within 40% of the all time high!

Mar 10 01:17 PM

[zagrebzagreb:]

One of the problems with Google is that it suffers from Amazon Syndrome, whereby the hype and newness of the brand overwhelms the fundamentals. In sum, you get a huge amount casual investors driving the share price (or institutions who refuse to do their homework)... I wouldn't consider Google a great buy until its P/E ratio sinks another 50%.

Mar 10 01:43 PM

[Alfredo Mar...:]

The stock is still simply too expensive. No doubt the company itself will continue to do well in the next few years, but as a long term play, it's quite risky at this price.

I really don't see how Google can go anywhere but down, they will never be able to capture any more market share than they currently have.

Internet giants that seem to have a complete lock on a market can easily get knocked off, just ask Yahoo.

Mar 10 03:36 PM

[bricki:]

Nothing ever grows to the sky.

GOOG will likely remain a great company for decades because the size of its infrastructure creates a significant barrier to competitors. But it is not going to grow at previous explosive rates any more than Microsoft Cisco or Intel did after they conquered their markets.

If you want your kids to thank you, find the NEXT GOOG.

Mar 10 04:58 PM

[ebooksuppliers:]

Google's been making over $13 a share. When we they ever reward their stockholders by paying a dividend?!

As far as I'm concerned, GOOG is way-overpriced by at least a factor of ten, and is no more than really expensive toilet paper-- unless and until they start paying some dividends. They certainly have the money to do it, but don't seem to have any plans to EVER pay anything as far as I can see. I won't pay more than $10 a share for any stock that has never paid anything, with only the "hope" that they someday "might". It's way too expensive to buy based purely on price speculation.

Mar 10 04:58 PM

[kris23:]

Isnt "GOOG always a good buy?" Ha ha. Their stock charts may not be compelling but its obvious without them that GOOG will never grow at the rates it did before because it's already infiltrated its market. They may be overpriced if you are looking for dividends. But I do think they are at a reasonable price right now. They will never see the 700's again but sentiment is strong and investors are always confident (www.predictwallstreet....) in Google's ability. After the economy calms down, Google should be back on track.

Mar 10 06:13 PM

[Bocaboym22:]

2 words. . . cloud computing

Mar 10 06:52 PM

[Sperry8:]

Here you go... almost 93% of employees repriced. Certainly no outside investors were given that option!

www.marketwatch.com/ne...={D262E863-5F4E-4F83-B...

Mar 10 07:22 PM

[G23ROCKS:]

I agree with this comment: "it seems a test of its 52-week closing low of $257.44 may be likely." GOOG pierced 300 with nominal rise in volume. We're back above $300 with today's market rally, but unless it holds and we get some volume into the name, it appears GOOG is targeting a retest of the low.

Mar 10 08:24 PM

[Eric Rasbold:]

Your right, and they suck, too!

They are the king of Ad program rip offs. Anyone who makes money off the AdSense program will find their account deleted and funds witheld...and with no recourse. They are jamming us on both ends, the merchant and the media provider.I hope they fall behind better technology and better marketing of a better engine.


On Mar 10 01:17 PM LA Tech wrote:

> The best days of GOOG stock are located in the REAR view mirror!
>
>
> This stock will NEVER get within 40% of the all time high!

Mar 10 10:24 PM

[currency x com:]

You don't need those figures and charts to look into google. The slowing trend is due ot the fact the company has become larger, the bigger it gets the slower it moves.. More employees, new thechnology, research and in some cases aquisitions.

Google is the leader in search marcket for the globe (less china) and is focusing resources in mobile technology fields, social media, etc. Right now there is no comeptitor to breath in google's neck. This means they will dominate the yard for the forseeable future.

Mar 11 07:02 AM

[Benjamin Ta...:]

It was a much better buy at $260 back in November of 2008. But with $17 billion in cash and $5.5 billion in free cash flow (FCF), Google is nothing to sneeze at. FCF also grew by 100% from '06 to '07 and 66% from '07 to '08.

Indeed, Google's outrageous growth is behind it but I don't have a problem seeing this stock at $400 which would give it a EV/FCF ratio of somewhere in the 16 to 18 range. In moderate times, that's a pretty reasonable price. It also represents a 28% premium over today's price.

Disclosure: I and my clients own shares of GOOG.

Mar 11 10:20 AM

[Chris B:]

"If the current share price holds, the implication is that the Company will not grow net income from 2008 levels for another three years, assuming that a stock’s return (30% CAGR, today) trends towards the long-term growth rate of a company."
----------------------...
The clause begining with "assuming" underlies the fallacy of rear-view mirror investing. Understand that the same thing could have been said for Yahoo! in 2002. This is the pitfall of using past performance and chart lines to develop expectations for future performance. One commentor said that Google's "infrastructure" created a "significant barrier to competitors." Again, apply that to Yahoo! circa 2000. On the internet, a better product can unseat the biggest competitors within a couple years.

I will speak heresy and say that there remain massive advances to be acheived in artificial intelligence, online finance, language, interface, cost, and information dissemination/overload control. Past experience indicates that established technology leaders such as Atari, Sony, IBM, Microsoft, and Yahoo are typically the least likely to drive these disruptive innovations. The reason is simple - top-notch innovators can make more money with their own businesses than by donating their output to a corporation. Google's innovative benefits and stock options won't be enough to offset this basic dynamic.

This risk of sudden obsolecence should be reflected by discounted growth among technology companies. I just don't see that in the pricing for most technology companies. I see an annuity present value approach applied to inherently ephemeral companies, justified by past performance.



"...it is interesting to note that all short term indicators were overwhelmingly positive just before Google’s swift and violent correction over the last month."
----------------------...
Suggesting that there is something wrong with using these "indicators" to predict the stock price in the first place, right? If reality disagrees with your theory, pick a new theory.

Mar 11 12:22 PM

[The Curious...:]

You are no doubt right about the potential for sudden and catastrophic obsolescence in Google's business. Ultimately, the individual investor must decide to what degree to handicap valuation based on this risk. I don't think that 60% market share is a strong enough competitive advantage in the search space, but I do think that Google has shown a tremendous record of continuing to push innovative new products and time will tell whether this ultimately translates into revenue.

As far as my statement about technical analysis, short term technical analysis must be confirmed by a long term trend. The only time this is not true is during a reversal and obviously a reversal can't be confirmed until we have the benefit of hindsight.

If you look at the first long term stock chart, GOOG is in a decided long-term downtrend. The reason I found it interesting that GOOG swiftly sold off despite strong short term technicals is that it shows that the stock most definitely was not beginning a reversal as even strong short term technicals were not able to overcome the long term bias.


On Mar 11 12:22 PM Chris B wrote:

> "If the current share price holds, the implication is that the Company
> will not grow net income from 2008 levels for another three years,
> assuming that a stock’s return (30% CAGR, today) trends towards the
> long-term growth rate of a company."
> ----------------------...
> The clause begining with "assuming" underlies the fallacy of rear-view
> mirror investing. Understand that the same thing could have been
> said for Yahoo! in 2002. This is the pitfall of using past performance
> and chart lines to develop expectations for future performance.
> One commentor said that Google's "infrastructure" created a "significant
> barrier to competitors." Again, apply that to Yahoo! circa 2000.
> On the internet, a better product can unseat the biggest competitors
> within a couple years.
>
> I will speak heresy and say that there remain massive advances to
> be acheived in artificial intelligence, online finance, language,
> interface, cost, and information dissemination/overload control.
> Past experience indicates that established technology leaders such
> as Atari, Sony, IBM, Microsoft, and Yahoo are typically the least
> likely to drive these disruptive innovations. The reason is simple
> - top-notch innovators can make more money with their own businesses
> than by donating their output to a corporation. Google's innovative
> benefits and stock options won't be enough to offset this basic dynamic.
>
>
> This risk of sudden obsolecence should be reflected by discounted
> growth among technology companies. I just don't see that in the
> pricing for most technology companies. I see an annuity present value
> approach applied to inherently ephemeral companies, justified by
> past performance.
>
>
>
> "...it is interesting to note that all short term indicators were
> overwhelmingly positive just before Google’s swift and violent correction
> over the last month."
> ----------------------...
> Suggesting that there is something wrong with using these "indicators"
> to predict the stock price in the first place, right? If reality
> disagrees with your theory, pick a new theory.
>
>

Mar 11 02:18 PM