As a more value oriented investor, I don't often buy the hot internet stocks. Like I wrote about in a previous article on Facebook (FB), many of these companies with nosebleed level P/Es and high expected growth are too speculative for my nature.
There are many internet companies however which after some years have started to show very good levels of value in the shares, and definitely classify as "growth at a reasonable price" companies. I believe that Google (GOOG) is one such company, which continues to have strong growth prospects but is trading at a reasonable valuation.
Here are seven reasons why I think Google is a worthy addition to any portfolio:
- King of Internet Advertising Market- As of September 2012, Google had the largest market share in online display ads, search and mobile advertising. The company has taken over Facebook in online display ads recently. Overtime the company's competitive moat is clearly becoming stronger in advertising. Although the growth rate of online ad revenues has slowed somewhat in recent years, it is definitely still an expanding business, as annual growth rates were 14% in 2012 vs. 2011. Any further improvements in the US economy should improve this growth rate further.
- "Google" has become an official word in the dictionary - You know a company has a sustainable competitive moat when the world is using its name as a verb for internet searching. It is officially included in Merriam-Webster. In the US this reminds me of other famous brands, such as Kleenex from Kimberly-Clark (KMB), which also is so well known and used that in popular speech people frequently would use the brand name as a replacement for the object itself. Although you could argue technology is changing much more rapidly than tissues, I believe Google has made itself one of the cornerstones of the internet and it will have a durable competitive advantage for years to come.
- Android now has a dominant 75% market share - According to IDC, the mobile OS continues to grow market share. 3 out of 4 smartphones shipped in the most recent quarter were running Android, which is good for 91% growth year over year. This is double the overall smartphone market growth rate. Although not the darling of the tech world that the Apple (AAPL) iPhone is, Android phones have clearly solidified their market leading position and dominance.
- Google+ is quietly gaining ground- Launched only in June of 2011, the Google+ social network already has 400 million registered users, 100 million of whom are active on a monthly basis. Although still well behind Facebook which now has 1 billion users, the initiative is off to a good start, and any further growth in Google+ will be a positive catalyst for the company going forward.
- Healthy Balance Sheet - Google maintains a strong balance sheet, with a debt/equity ratio of only 0.11. The current ratio is also almost 4, and the company has more than $44B in cash. Clearly the company is in no financial danger anytime soon, and has plenty of financial flexibility to keep gobbling up startups and other companies to help expand its business. Google has purchased more than 100 companies in 14 years, and doesn't appear to be slowing down.
- Analysts are Positive on the Stock - Google is covered by 35 analysts, who have a median price target of $800/share and an average rating of buy. This is good for a 16% upside from the current market price of $687/share.
- Reasonable Valuation - Google has a forward P/E of only 14.8 and a respectable EV/EBITDA of 11.94. In terms of discounted cash flows, Google has a ridiculous free cash flow growth of more than 60% in the past 10 years. As very few companies can maintain such high growth rates, especially ones as large as Google, in projecting out future cash flows I would take a much more conservative growth rate of say 15% in the coming 10 years, and 3% after that. Using a discount rate of 6%, which I normally use to compare investments against what I consider low risk alternatives, Google would have an implied intrinsic value of $1174/share, giving it a margin of safety of around 40%.
When I look for value in a company, one of the most important aspects is a durable competitive advantage and a strong business moat. I believe Google has built this over the past few years, and there are lots of positive catalysts for the company that can keep the stock moving upwards. I think Google is a company definitely worth considering for your portfolio.