Google Has 30% Upside, Oracle More Than 45% Upside

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Includes: GOOG, ORCL
by: Global Value Investor

Google Inc. (NASDAQ:GOOG) is another technology heavyweight and the leading internet information provider worldwide. The stock just shot up over the years and investors might ask whether a long position can still be justified. In my opinion: a clear yes.

Google has convinced in the past with both high growth rates and profitability and at some point became a darling of the investment community. Expectations had been lofty, but Google now trades at quite reasonable valuations.

Investors can snatch up the worldwide leader in internet search engines for a forward P/E of 11.3. This means, a high-growth, high-profitability company with a great earnings track record can be had with an earnings yield of 8.8% which is a remarkably interesting opportunity.

Of course, investors do not get to enjoy a dividend, which is fine with me, as the company can invest its profits much better than I can over the long term. The return on equity stands at about 20% - which is the opportunity cost that investors must be able to beat if they want to invest elsewhere.

Average analyst earnings estimates stand at $50 a share for 2013. A P/E of 15 (which is still cheap given the profitability of the company) leads to a target share price of $750 - which is about 30% above yesterday's share price and in range of its 52-week high of $670.

Technical traders might find Google interesting if it breaks or rebounds from its support level of $560. Since the gap of October 2011 would be closed already once the stock touches its support level, a long-position might be more tempting than going short.

Oracle Corporation (NASDAQ:ORCL) had a nice run-up since June recovering most of its heavy May losses when the stock went down from $30 to below $26. In addition, the stock was able to find its support level at $26.60 and is now touching its one-year upper trend canal. So, is it time for investors to invest at the breakthrough or see whether the trend canal proves to be to strong at the moment imposing a ceiling on the stock price?

On a valuation level Oracle is quite interesting: With a P/E ratio of only 10, this heavyweight in application software is for sale. The profitability measures are convincing as well: The EBIT margin stands at 37% and the net profit margin at 27%. The company also achieves a very respectable return on equity of 23%.

Analysts estimate that the 2013 EPS hits $2.92, which is just about 3% lower than my earnings estimate of $3.00. Even then the company trades only at a multiple of 10. If investors extrapolate past profitability and growth rates (including the terminal value), a more appropriate multiple of 15 would yield a share price of $45 based on 2013 earnings. In that case, ORCL has an upside of 50% over the next two years just by achieving results it did in the past.

Both valuation and the technical chart pattern make this stock interesting. Value investors are attracted to its low price, chartists might want to wait to see whether the stock breaks through its trend canal before they initiate a momentum-driven long position.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ORCL over the next 72 hours.