Chad Brand

Google: Believe It or Not, The Stock Looks Cheap

Frank,

I blog at www.peridotcapitalist..... Seeking Alpha has permission to repost my articles on their site. Therefore, I have no affiliation with SA and they have no say over what I write. If I were an employee of SA and was writing about Google, perhaps a disclosure would be helpful. In this case though, I don't think there is a conflict of interest. If you disagree, by all means feel free to express that to SA's editors.

Google: A Year After The Wall St. Journal's Cover Story

Given the market swoon lately, that really is the question to be asking now that the stock is under $440 per share.

Current estimates are for earnings growth in 2007, 2008, and 2009 to be 35%, 29%, and 25%, respectively. Given that Google's margins will contract over time as it enters lower margin businesses, sales will have to grow by 40%, 35%, and 30% over the next 3 years just for them to hit those numbers.

Personally, I'm not willing to pay a high multiple for a stock with such high expectations built into the shares. There is very little room for upside, in my view. The most I would be willing to pay would be 30 times 2007 numbers, which comes to around $425 per share.

Paying more than that would require more confidence that 1) current growth projections are likely, and 2) they might even have decent upside to them. With 30 to 40 percent sales growth baked in for the next 3 years (which is an eternity in tech land) it is not going to be a piece of cask for the company to meet or exceed current expectations.

So that's my two cents.

Google: A Year After The Wall St. Journal's Cover Story

Of course there are many other possible scenarios. I could have sold it at $330, or at $510, or at any other price in between. However, I can't speculate as to when/if I would have sold later if I chose to hold my stock, because it's unknowable.

Nothing fundamentally has changed with Google over the last year... they are still going into new markets, spending a lot of money to do so, and hoping to cash in on those other businesses as well as overseas. So, if I didn't sell for the reasons I did, I probably would have held the entire time like Mr. Gordon did.

The point is, since I sold my stock, Google has underperformed the market, so doing so has helped my returns. Long term holders like Mr. Gordon have also done well, as the stock has risen nearly 20% in the last year. So, both camps are happy. That was the point of the piece.

Google: A Year After The Wall St. Journal's Cover Story

So you are saying I should have not sold GOOG but rather kept it while it underperformed the S&P 500? Hardly a way to generate superior investment returns. I prefer to outperform, but maybe that's just me.