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Over the past two and a half years shareholders of Google (NASDAQ:GOOG) have not seen the same growth on their shares as they have observed in the financial statements. The volatility over that period has been tremendous, and if you were holding on during this roller coaster you saw shares trade up to the mid-$600 range down to the mid-$400 range and back up again. With no dividend payment or share repurchase program, shareholders haven't received much for holding onto the search engine giant. However, based upon multiple historical price models, it appears shares are likely to break out of this trading range.

GOOG Chart

GOOG data by YCharts

I will begin by pointing out that all my research is done using GAAP results. Google reports both GAAP and non-GAAP results on their quarterly press releases, so be aware if you compare my data with other sources.


One of the reasons Google has been such a volatile stock is due to management's lack of clarity and consistency. A perfect example of this is the following comment which management uses regularly, "We expect to continue to make significant capital expenditures." The market loves stable earnings, Google has repeatedly said they plan to make investments that will grow the company into the future and will not strive to meet analyst quarterly expectations. You can see massive gaps in the stock price following earning announcements both upward and downward as investors continue to be shocked by earnings announcements. That being said, Google continues to grow EPS at rather robust rates. As the chart below shows, shares trade at 20x TTM earnings versus a five year average of 27x earnings.

Source: Google 10-K's and 10-Q's


Revenue has grown from $16.6 billion in 2007 to just over $43 billion in the trailing twelve months. In 2007 shares of Google cost 10.27x revenue, today shares trade at 5.16x. The five year average price-to-sales ratio is 6.76x. You can see in chart below we are trading well below the historical average.

Source: Google 10-K's and 10-Q's

Price-to-Operating Cash Flow

One of Google's most attractive features as an investment is the amount of operating cash flow they produce. In 2007 the company produced $5.8 billion in operating cash flow, over the trailing twelve months they have generated $15.8 billion. Even with growing capex spending, this growth has led to a swelling of Google's cash, cash equivalents and short term investments portion of the balance sheet, reaching just over $43 billion as of the last quarter. The five year average price-to-operating cash flow ratio is 18.36x. As depicted in the chart below, shares currently trade slightly north of 14x.

Source: Google 10-K's and 10-Q's

Price-to-Book Value

True value investors will certainly be intrigued by price-to-book value ratio. In 2007 investors were paying 7.51x book value per share, as of the TTM you can purchase shares of Google for under 3.5x. Over that same period shareholders equity has grown from $22.7 billion to $64.7 billion. The growth was fairly stable with equity growing at 24.26% (2008), 27.5% (2009), 28.43% (2010), and 25.74% (2011).

Source: Google 10-K's and 10-Q's

Enterprise Value-to-EBITDA

Prior to 2010 Google had no debt outstanding and financial statements were fairly straightforward. With the issuance of debt in May 2010 (3 year notes at 1.25%, 5 year notes at 2.125%, and 10 year notes at 3.625%) and growing amounts of depreciation/amortization expense, the bottom line earnings number is somewhat distorted. Looking at EBITDA gives us a clear picture of how the core business is performing. TTM EBITDA currently stands at $15.3 billion, up from $6.05 billion in 2007. The five year average EV-to-EBITDA multiple is 15.57x, as you can see in the table below we are still trading below this level. (Note: My Enterprise Value calculation factors in non-cancellable future lease payments)














Source: Google 10-K's and 10-Q's


Technical traders have been the only real winners over the past two and a half years with Google. While there will always be opportunity for technicians to make money in stocks, I think that the time has come where buy and hold investors will begin to see shares of Google provide that much needed capital appreciation. The companies dominant market presence (66.8% of all searches) in search which will continue to provide stability in earnings. The next closest competitors are Microsoft (NASDAQ:MSFT) and Yahoo! (NASDAQ:YHOO) which only command 15.7% and 13% of core internet searches respectively. Who knows where the next growth opportunity may lie in this company, there are numerous stories that may play out:

  • YouTube may become the go to spot to watch television and movies
  • The recent Motorola Mobility purchase could open up doors for Android growth (currently over 1 million Android handsets are activated daily)
  • Google Wallet may change the way we make purchases
  • Google+ may take market share away from Facebook (NASDAQ:FB)
  • Could computing and data storage (i.e.: Google's IT infrastructure investments)

The company is going to continue innovating, that much we can count on. With rival Apple (NASDAQ:AAPL) recently initiating a dividend and announcing a share repurchase program, we can likely count on Google following suit over the next few years (all that cash will need to go somewhere). Even with the recent run up following the Q2 earnings announcement, in my opinion Google shares offer an attractive entry point for longer term investors.

Note: All data reported and graphed is pulled directly from Google's SEC filings (10K's and 10Q's) then ran through proprietary valuation models. The stock price used was from 8/22/12.

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.

Source: Google's Valuation Remains Attractive