Google Hits a Wall - Time to Buy?

by: TMT Analyst

Google (NASDAQ:GOOG) is having a rough time. Earlier this week Goldman Sachs removed it from the conviction Buy list. The Wall Street Journal writer Martin Peers wrote off Google's cell phone plans as a failure after Google stated it would not offer the Nexus One to Verizon's (NYSE:VZ) more than 90 million customers. Research firm Analysys International stated that Google's market share in China dropped to 30.9% in 1Q10 from 35.6% while Baidu's (NASDAQ:BIDU) share increased to 64% from 58.4%. Both Yahoo (NASDAQ:YHOO) and Microsoft's (NASDAQ:MSFT) Bing's search engines are taking share from Google in the U.S. according to data from comScore and Hitwise.

A weekend Barron's article listed Google stock as overvalued. Microsoft and Facebook have partnered to create Docs for Facebook, a competitor to Google Docs. Yahoo's display business grew 20% y/y, while Google's nascent display business outside of DoubleClick is struggling to gain traction. Microsoft filed a patent infringement case against Google's Android operating system and tops it off by signing a patent agreement with HTC Corp that provides broad coverage under Microsoft's patent portfolio for HTC's mobile phones running the Android mobile platform. Talk about hitting him where it hurts. And one more to the chin, Apple's (NASDAQ:AAPL) acquisition of Siri (NASDAQ:SIRI) begs the question - did Apple enter the mobile search business to directly compete with Google?

In all my years trading in and out of this stock, I have never seen this onslaught on Google.

The above concerns have been reflected in Google's share price which have underperformed its peer group. The shares are down 15% since the start of the year vs. a 7% move in the S&P 500, a 0.1% move for Yahoo, a 2% move for AOL, and a whopping 51% move up for Baidu, with Baidu's run tied to Google's decision to exit China. Baidu is likely to move further ahead after the spectacular earnings, guidance ahead of Street, and 10 for 1 stock split.

The shares now trade at 19x 2010 earnings versus the Internet peer group at 30x and Google's five year historical average of 35x. The core business continues to perform well and the runway is wide and long there. I am therefore convinced that the bevy of concerns above have been appropriately valued in the shares and I am buying the shares.

Disclosure: I am buying GOOG Shares.