Why am I recommending you dump Google (GOOG) now at $690? As an investor and not a gambler, I select stocks that are undervalued. Google at $690 is way overvalued. How overvalued is Google? Let's do some number crunching and research on Google.
To ground myself as an individual investor up against hedge and mutual fund managers, and to avoid the Wall Street hype built into a company's retail stock price, I use a valuation formula I call "the pawn price." What is Google's pawn price? Using Google's third-quarter financial press release, its pawn price is $20.70. The pawn price gives me a quick and effective bankruptcy price. To avoid repeating myself on how I arrived at Google's pawn price, I explain it in great detail in the pawn price link above.
Google turned in an unexpectedly weak quarter, and when an overpriced stock doesn't deliver a strong quarter the market rips into its share price hard and fast. I buy stocks not for their past or current price, but for their future price. This is how the managers of hedge and mutual funds buy stocks and it's how you should buy and sell your stocks. I look for undervalued stocks. I ask myself: Is Google undervalued at $690? I ignore analyst estimates, because no one can predict the future with perfect accuracy. I rely on a company's financials, its position in relation to its peers, any news, changes in senior management and/or board, pending and/or current litigation and/or government(s) investigations/inquiries/actions against Google, etc. By looking deep into all these areas it allows us to see if Google truly is undervalued and the market is just temporarily overreacting.
Let's take a quick look at Google's past financials. Google's past financials reveal a healthy and clean set of numbers. Strong assets, small long-term debt, lots of cash. These financial numbers look robust. Now let's dig deeper into Google's most recent financials. Google's net income sank to $2.18 billion, or $6.53 a share, from $2.73 billion, or $8.33 a share. By looking at the past you get a better understanding of the present and later once you put the news into the present you get a glimpse into Google's future. The future that caused at least one fund manager to exit recently.
Google is a market leader in web search, phone OS, and maps. So a misstep in one quarter with over $45 billion in cash reserves -- is that alarming or isn't it? Why then would a large player exit from what looks to be a financially sound and strong global competitor for future quarters?
Then I do a news search on Google. Lots of articles and news to scan for any items that can give clues to the sudden drop. Sudden drops occur, because large positions in a stock are reduced. Usually someone knows something way before hand. Other times someone is just taking a profit. We need to find out as an individual investor if it is profit taking or if is there something making large players exit. I'll read through the items that catch my attention later after I do a search on management.
I look for companies with world class management. Why? When times get tough, a companies management and its board help it get through the storms. Lots more to read on Google's management and board from Yahoo search.
Next I go to Seeking Alpha for a deeper understanding of a particular stock, bond, ETF or other financial instrument. Seeking Alpha is my favorite financial website for an insight into a stock. Why? You get in depth analysis and critique from the pros and amateurs. You really are at a disadvantage in your portfolio decisions if you are not doing research on your market holdings at Seeking Alpha.
I discover several things that concern me as a potential investor in Google. The combination of these challenges is probably why the stock has dropped and will continue to drop. Several key senior managers have left the company and headed for Yahoo (YHOO) and Apple (AAPL). Yahoo had a great quarter thanks to its ex-Google managers. These ex-senior managers from Google are using the same techniques they learned, developed and perfected at Google. Google needs to retain its senior management team or its future revenues and market share will be handed over to its competitors.
The future now is becoming clearer concerning Google's future search revenue. Looking at the Yahoo global market share chart below you can see how fast former Google senior manager Marissa Mayer has transformed Yahoo's global market share as its new CEO. Apple is doing the same in its woeful maps division with senior managers it hired from Google's map department. Now we are beginning to see what some very future looking fund managers discovered a few weeks ago.
Click to enlarge images.
Let's dig deeper and see what else is in store for Google's future revenues and its stock price.
Let's look at the Vringo (VRNG) patent lawsuit. Normally lawsuits don't phase me, because its part and parcel of the litigious society and culture we live in. This lawsuit is different, because it affects Google's main profit center; its search engine business. The judge has ruled that "Vringo can't collect damages from Google for the six years preceding the filing." The judge also "shot down a Vringo request to refrain from making a final ruling on the matter until Vringo presented a rebuttal witness." What this means is that Google will most likely be making a payment to Vringo for future use of its patents. How much? I have no idea, but that will affect its search revenues. Google's senior management took a risk and went to trial and limited its past damages, but not its future revenues as far as this law suit. Now you see why I invest in only companies with world class management and boards. Need to dig deeper so we can invest and not gamble in Google future.
When governments get involved in a company's business practices it spells trouble. Take for instance the news that the Federal Trade Commission (FTC) in the U.S. is contemplating suing Google for violating antitrust laws.
Then last Tuesday came word that French President François Hollande is pushing for a link tax to help French media. According to Google they will stop linking French news articles to search results, which would remove 4 billion clicks per month from Google. How big of an impact would that be? I have no idea. Then on Wednesday, it was reported that the French tax office will be handing Google a €1 billion tax bill to make up for revenues from France routed through Google Ireland. The French tax office just saved us quite a bit of research on how much that would cost Google. Google used the same rerouting play with China a few years back. China was censoring Google content and Google's senior management and board out smarted China by them by rerouting their search results. Will Google's senior management and board be able to outsmart France as easily? Let's think about that for a moment.
France is part of the EU block of 27 countries. The EU is near bankruptcy and is looking for new revenue streams to offset their fiscal mistakes. Google might end up sharing its search revenues not just with Vringo, but with governments all over the world. YouTube revenues are being shared with the film and music industry.
I'm an investor, not a gambler. Investing in Google for the next quarter or two at these inflated prices is a gamble. Why? The former Google managers at Yahoo and Apple are figuring out how to compete with Google in search and maps. Governments in the U.S. and France are getting ready to launch major legal actions and or inquires into Google's business practices. What this means is that Google's near monopoly of web search has peaked at 88%.
Google's Android OS has reached 75% of the worldwide market. Google doesn't have much room for growth in either their search or phone OS divisions. Adding the FTC staff recommendation to sue Google over its business patent practices steaming from its Motorola purchase brings added pressure on its already weak Motorola Mobility unit.
Google at near $700 and facing renewed formidable competitor challenges in its search and mapping divisions means its revenues and market share peaked and heading down. Adding the Government antitrust lawsuits and inquiries steaming from its phone OS and patents in the U.S. and tax litigation on its search division in France bring further revenue and market share losses in the coming quarters.
You can now clearly see and follow the smart fund managers out of Google. Of course, they saw this way before you did and sold off their Google shares above $700. You would not be that far off from their exit points at $690. Remember, smart money always invests in the markets, they don't gamble. If you own shares in Google and want to stay for the coming drop I would buy an equal number of puts or add stop losses to your investment. Google gets attractive to me in the low $400's range with all that cash on hand.
Google like Apple grew to its present, gigantic proportions during the worst economics crises in modern times. It has a world class senior management team and board to handle all of these present business challenges. At nearly $700 and facing diminishing future revenues from its mature search business to its rivals and government lawsuits, I see Google's stock price quickly heading down into the high to low $400s. I can't overstate how good Google has been as a long-term investment, but I'm investing in its future and at $690 I see no upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.