Google: Second Quarter Forecast And Share Price Forecast

| About: Alphabet Inc. (GOOG)

The share price of Google (NASDAQ:GOOG) continues its climb towards $1,000, but will that be the end of the advance? Probably not. Google gained traction in smartphones and advertising, but it is only just beginning to show what it can do in tablets, notebooks, and media. The list goes on and on with this company.

Well, one of the things you like as an investor is seeing the results of research and development expenditure. Google is certainly producing new and innovative products; there is Google Play, Google Glass, Google Fiber, Android, Chromebook, and the driverless car. I apologize to Google and the readers if I left one or several out of the list. You get the point. Google is innovating and it is showing up in the financial performance and valuations.

That said, research suggest, companies that underperform the market in previous periods outperform the market in future periods. In this case, Google outperformed the market in every period from 3 months to 5 years. Consequently, it may be probable that in the next 5 years Google underperforms the market.

But, Google's management is meeting its goal of increasing the book value of the company. Also, while it is trending lower, the twelve trailing months return on equity remains at an excellent 16.32%. At the end of the day, Sergey Brin and Larry Page are extraordinarily intelligent and run an extremely innovative company, which suggest the valuations are likely to continue to increase. I think it is possible, if not probable, that Google becomes the largest company in the world by market capitalization within the next five to ten years. I think if you accumulate shares on declines; the throwbacks may be shallow.

Recent Developments

  • Other revenue, which includes Google Play, generated $1 billion in the first quarter. A significant portion of the other revenue growth is because of an accounting change.
  • Google Fiber is live in Kansas City and is rolling out in Austin and Provo.
  • Google Glass rolled out to developers.
  • The Samsung (OTC:SSNLF) Chromebook has been the top selling laptop on Amazon since it launched.
  • Enhanced campaigns are campaigns that run on desktop and mobile, which are almost completely rolled out.

Segment Analysis

From a segment perspective, Google remains mainly an advertising firm generating revenue from search. Motorola (NYSE:MSI) accounted for 8.2% of total revenue in 2012. That said, I'm looking for about 13-20% percent revenue growth from the main Google business and negative 5% to +5% revenue growth from Motorola this year. My model implies that Google's growth rate begins to slow.

Thus, I am forecasting Google revenue of $12.39 billion to $13.16 billion in the second quarter. Motorola revenue should be in the $1.19 billion to $1.31 billion range. Second quarter 2012 revenues were $10.96 billion and $1.25 billion.

To be clear, the segment analysis paints a bullish picture. But, the Motorola business could be to Google what Sun is to Oracle (NASDAQ:ORCL); meaning, Motorola could be a drag on financial performance. So, Motorola could be a drag and the core Google business could slow, in term of revenue growth; those are some of the risks to my outlooks, but not all of the risks Google faces.

Consolidated Forecast & Valuations

On a consolidated basis, I am looking for revenue in the $13.58 billion to $14.47 billion range during the second quarter. The operating margin should be in the mid 20s and the net income margin should be between 18% and 23%. I think revenue will probably grow in the 15% to 20% range during this year.

I'm expecting revenue of $57.7 billion to $60.2 billion, operating income in the $12.69 billion to $16.26 billion range for the full year, and net income could be in the $10.39 billion to $13.85 billion range.

Additionally, I'm modeling revenue growth of 10% to 15% between 2014 and the end of 2017; Google could reach $100+ billion of revenue in 2017.

In terms of operating expenses, Google spends a substantial amount of revenue on research and development; I think that is flowing through to revenue growth.

The forecasted consolidated financial performance paints a bullish picture.

GOOG S&P 500 GOOG 5Y Avg*
Price/Earnings 26.7 16.6 23.9
Price/Book 4.1 2.3 4.0
Price/Sales 5.6 1.5 5.9
Price/Cash Flow 18.1 9.9 15.2

*Price/Cash Flow uses 3-year average.

On a time series basis, Google is overvalued. Relative to its 5-year averages, Google is fairly valued to modestly overvalued; and, relative to the S&P 500, Google is overvalued. Common equity shares of Google are overvalued. At the same time, the market is pricing in the company's growth, which makes the company modestly overvalued.

The company's financial performance is amazing for a company with a $300 billion market capitalization and the valuations reflect that fact.

Share Price Forecast

In a perfect world, I could model this share price and say not to accumulate until the share price is in the $650-$800 range and that would work. In this case, I'm not sure that Google's share price will decline that much, because of the strength of the business.

No substantial declines of the share price during the recent cyclical advance.
(Click to enlarge)

Google is a company coming up with transformational new products and revolutionizing the way things are done. In other words, Google is the new Apple (NASDAQ:AAPL). Thus, my share price forecast calls for a much higher share price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.