I happen to like Google (NASDAQ:GOOG). I like the business, I like the growth, I like the strong and clean balance sheet.
As a result, I find myself wistfully thinking about Google every so often. So I found it interesting yesterday, when Google was on my mind, that there was a write-up in the Wall Street Journal about the stock.
The column was in the Personal Finance section of the Personal Journal, and there were a couple points from the article that I had a bit of trouble swallowing. For one, the author makes the claim that Google has "a rather modest forward price/earnings ratio of 35." Now I don't know about anybody else, but for me, a P/E of 35 is a far cry from modest, especially when you're talking about a company with a market cap pushing $150 billion.
Maybe what he meant was when compared to the forward P/E's of, say, Yahoo! (NASDAQ:YHOO) at 56 and Amazon.com (NASDAQ:AMZN) at 70, Google's seems more reasonable. But Google is also almost four times as large as Yahoo! and five times the size of Amazon.
The other area of the article I cringed at was his contention that Google has a natural monopoly. Without getting into a long, draw-out discussion, I just don't agree there. Google has a very strong position and a high market share in a young and fast growing industry, but I would not call Google's search business a natural monopoly. I think we are only in the first inning of the story of search and Google, and though it's been hitting the cover off the ball so far, it still has its work cut out for it to maintain market share and profitability.
However, all that said, I tend to agree with the conclusion that the author reaches: "should Google drop below $450, I'll be clicking 'buy.'"
Part of my periodic check-ups on Google include taking the temperature on valuation. Google and I had a little fling around this time last year when the whole market sold off -- the stock dropped well under $400 and I just couldn't help myself. Of course, when it ran right back up, I went ahead and took the quick gains. Not bad considering it's been basically dead money since then.
At this point I wouldn't mind the opportunity to step in on Google to hold some for a good long while. We'll say more of a 'serious relationship' than another fling. Given the growth it's seen and the amount of cash the business produces, I don't think the price right now is wholly unattractive (yes, despite the 35 P/E). The problem is that you have to be on board with an average of 30% growth over the next five years.
I think that it could be worth the risk, but there's even more need for protection when you're talking about assuming growth rates like that. That's right, I'm talking about the good ol' margin of safety. At its current price there's some buffer, but if it did happen to fall 5% to $450 (or even a bit lower), there might just be enough there to let you sleep well at night.
Of course, if you buy almost any stock low enough you'll probably sleep OK -- the question is whether Google will actually get there. And the answer to that question is one that can only be answered by time... and Mr. Market, I guess.
GOOG 1-yr chart: