Google (GOOG) as we know is the dominant global player in the online information revolution. With a strong 2012 campaign Google will have earned an estimated $43.20 per share, more than double the 2008 haul of $19.49 per share. Yet even with EPS doubling, and global market share growing, the shares are basically flat over the 4-year period. Enter the next great chapter for Google, full monetization of Android software, and many speculate, the entry of true Android tablet hardware.
Quick Thoughts
First to quickly make note of Google's growing EPS and ad/search based revenue; the shares are looking to earn $50.58 in 2013 according to estimates, meaning the shares currently trade at 12.04x 2013 earnings (at $609 a share), strong earnings growth for a "mature" company pushing 200B in market cap. 12x earnings is far too low a multiple for a company soon to be a major player not just online, but in mobile software, tablet software, media streaming, and I speculate physical hardware in the next few months.
Quick Thoughts II
Think about it, Apple Inc. (AAPL) was able to make a fortune selling what everyone believes is a beautiful, intuitive, physical product; but what people are really buying is the beautiful Apple software, and ecosystem. I know it is controversial to say but if any 15-25 year old can assemble an iPad or iPhone 4s, the value lies with the software. Google Android is currently being leveraged poorly but that is about to change, unlocking value for share holders.
Time to Start Building a Position
Aside from the strong earnings growth, dominance in search, and the massive intellectual moat Google enjoys, I want to focus on hardware speculation. Rumor has it Google is working round the clock on a Google "Nexus" tablet. After watching the Amazon.com (AMZN) Kindle Fire use its stripped down Android operating system to become the #2 selling tablet globally, resulting in little profit for Google, the company has finally realized it made a strategic mistake. It is time for Google to get into the game. The tablet and smartphone markets are the fastest growing in history, and Android without the "Apple Premium" will soon be available to all 7 billion of us. One needs only to look at these Android smartphone growth projections to see the wave of Google about to swell up globally. A Google "Nexus" tablet would be a strong competitor to the iPad; with strong brand recognition, immense software resources, and a rapidly growing ecosystem.
Quick Note on the Android Ecosystem
Think Google Play. "Now your favorite music, books, movies, applications, and games are all in one place that's accessible from the Web and any Android device." - Google. Let's not forget Youtube.com and Google+.
Pure Rumor and Speculation: (the best kind)
For almost 2 years Google bulls have asked where is our Google "Nexus" tablet? If Amazon can sell millions Kindle Fires, it cannot be that hard. Recently in March, semi-concrete evidence Google upper management was working on something other than a self-driving car emerged. Which is good because I don't see the self-driving car driving profits anytime soon.
Google "Nexus"
During the April earnings call CEO Larry Page was asked about the company's plans for a tablet, he noted that no current tablet ran a "full version of Android." Why leave potential unfulfilled? Also of strong interest to the cause, "Asus reportedly scrapped its MeMo 370T announced during CES 2012, which is a tablet with a 7 inch screen, NVIDIA Tegra 3 quad-core processor for $249," this is huge because many speculate this 7 inch Asus tablet was "scrapped" to become the Google "Nexus"; Google's first full-Android competitor in the global tablet space. A quote from gadgetbox.msnbc.com states: "Page still sees the possibility of power and profit in these lower-cost devices, and said that "it's an area we're quite focused on." A lower cost, smaller 7-inch Google tablet would have many advantages: a lower price point to compete effectively with the Kindle Fire, longer battery life due to the smaller screen size, greater portability over the larger Apple iPad, and the mass appeal would greatly expand the number of users in Google's Android ecosystem, putting cracks in the Apple and Amazons armor.
A successful and profitable 7-inch Google "Nexus" tablet would be a true game changer for the company. With millions of new eyeballs, consumers, and fans, Google's core businesses, Android, and media offerings such as Play and Youtube.com would enter a new era of popularity. The future should be a hundred million users streaming music and movies from Google; searching the internet, surfing the internet, watching content on Youtube.com, downloading applications from the Android Market, reading the NY Times, and maybe even checking your Google+ account, all on your "Nexus" tablet.
Other Notes: A Possible Dividend?
Google has never paid a dividend and many claim it never will. But times are changing, and Google has billions in cash. Now I know most of Google's cash is "trapped" over seas, but shareholder pressure has been growing heavy as of late and longtime dividend holdout Apple has become the 2nd-largest dividend payer behind only Exxon Mobile. Google within the next few quarters may begin paying investors a small dividend; attracting the dividend investor crowd and rewarding long-term holders.
Negatives
The controversial 2-1 stock split. I have minor concerns the new non-voting Class C shares created by the split will trade at a discount to voting shares. Many newer investors were surprised by the founders' move to maintain voting control, but longer-term holders who read the IPO filings understood it was always the founders intention to retain total voting control over the company; Google is not a democracy. Only time will tell if or what discount the new Class C shares will trade at.
Conclusion
Google shares are down over -5% year to date and have under performed both the S&P500 and the Nasdaq indexes. Google is no longer a small start up at around 200B in market cap, and falling cost per click revenue concerns have put a lid on the stock for the last few quarters, but as the global macro scenario improves ad revenue will follow strongly. Google shares have consolidated in my opinion over the last few years while the company has performed strongly; currently trading at the lowest multiple since coming public almost 10 years ago at 18.6x earnings (excluding the 2008 drop).
If you believe Google's pure Android tablet will be a game changer, and an earnings driver, you will want to start building a position before the release. I can only speculate the shares will spike 3%-5% on the announcement of a truly competitive "Nexus" tablet; based heavily on the reaction I saw from Amazon.com stock after the Kindle Fire was announced, the stock went above $135 onto an all-time high. Furthermore, there are many reasons to believe Google will be a very strong competitor in the global tablet space: possessing a strong pool of patents, immense capital, a strong library of media services, and an overall massive and very vibrant ecosystem to offer the Android consumer; millions of which already love Android via their smartphones.
Timing, valuation, and catalysts are important when choosing to build a position in any stock. For Google, the shares have traded almost completely flat for the last two years, the earnings multiple indicates value, growth is strong, the smartphone market is red hot, and a pure Google Android "Nexus" tablet released in the next quarter could drive earnings from 10 different angles. The value of Google shares here in the low $600's is compelling.
Always do your homework.
