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Google, Inc. - Thoughts on Arithms

|Includes: AABA, Alphabet, Inc. Cl C (GOOG), MSFT

They announced earnings and investors went goofier than they already are, driving the price of the stock up above the $600 mark.

That someone, anyone, would be willing to pay $600 to own a stock amazes us, much less a stock that has gone up in price almost 25% since mid August.

But such is the life of the Queen of Search, Google, Inc. (Nasdaq: GOOG), who announced earnings last week and then watched their stock price move higher by more than $60 a share.

As the single, most dominate search engine of the internet, we think the algorithm that Google as developed and continues to develop, an algorithm we call the Googarithm, is simply the best of the best.

Certainly the Googarithm has its competitors. Microsoft Corporation (Nasdaq: MSFT) has deployed Bing, which we think is simply a stupid name. Bing?

Not only does the Bingarithm not work as well as the Googarithm, but because Google controls so much of the advertising associated with search, the Googarithm can simply direct queries to sites that support Google with advertising dollars.

What is it that Bing does? Sing “White Christmas”?

Then there is Yahoo!, Inc. (Nasdaq: YHOO). The Yahooarithm is, well it’s just odd. What we have often wondered is with all of the advertising revenue that Yahoo! has at its disposal, why its search engine doesn’t seem to capture the Yahoo advertisers.

Okay we admit that Wax Ink is “arithmless”. But still, as strange as this may seem, we are able to think beyond the front or pants!

And in doing so, we came to the conclusion, admittedly without much thought, that we should support companies that support us before we support companies that don’t. That does stand to reason, right? 

Basis 

Financial information presented in this report for Google, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 12, 2010. 

What They Do 

Google, Inc. is a global technology leader, focused on improving the ways people connect with information.

The company’s innovations in web search and advertising have made its web site a top internet property and its brand one of the most recognized in the world.

The company maintains a large index of web sites and other online content, which they make freely available via their search engine, to anyone with an internet connection.

The company’s automated search technology helps people obtain nearly instant access to relevant information from the company’s vast online index.

The company generates revenue primarily by delivering relevant, cost-effective online advertising. Businesses use their AdWords program to promote their products and services with targeted advertising.

In addition, the third-party web sites that comprise the Google Network use its AdSense program to deliver relevant ads that generate revenue and enhance the user experience.

The company was incorporated in California in September 1998 and reincorporated in Delaware in August 2003. 

Short-Term Investment 

The stock closed recently at $601.45 with resistance at $629.51, a 5% increase from a recent close, and support at $518.99, a 14% decline from a recent close.

The stock is clearly in an uptrend, and has been since mid September. With the recent earnings announcement, the stock price has been pushed well into overbought territory.

Since we simply have no idea on a short-term basis what the stock price is likely to do, we have no short-term interest at this time. 

Long-Term (5 Year Hold) Investment 

The company has several financial metrics that must be the envy of every company in America. Their Current Ratio at 10.5, Quick Ratio at 10, and Cash Ratio at 9, are all well in excess of what we consider investment quality.

Couple these ratios with the company’s Return on Invested Capital of 36%, and its Free Cash Flow of $21 per share, and then consider that the company’s earnings yield at 3.23% exceeds the yield on a AAA rated corporate bond by better than 2:1, and it’s no wonder investors are willing to pay such a ridiculous price to own the stock. 

Valuations 

Based on our review of the company’s latest annual financial information, our Reasonable Value Estimate for the stock based on a 5-Year hold is $125, with a Buy Target of $75, a First Sell Target of $146, and a Close Target of $154.

But all is not perfect, primarily because of the high stock price. With the current price 10 times greater than the company’s Net Current Asset Value, a Trailing Twelve month PE of 31 and a Price to Tangible Book of 8, we think the stock price relative to the stock value, is excessive.

In addition, with EBITDA at 41.5% of sales, and Enterprise Value at $576 per share, the Merger and Acquisition return period works out to roughly 23 years, assuming EBITDA stays at current levels. 

Final Thoughts 

The company is on top of its game as a revenue generator. But as a company, we have to wonder.

Recently we had an issue with our AdSense account. Not only did it take us almost 6 months to reach something that was not automated, we were never able to address our specific issue.

Accordingly, we no longer have an AdSense account, nor do we have the little bit of revenue, about $100 a month, that having an AdSense account generated.

We understand that the company is in business to make money. So are we. And we realize that the company provides vast free services not only for small business, but also for anyone with an internet connection. For that we cannot thank the company enough.

But to us, there is a certain amount of humility associated with being the biggest, or the best, or the most anything. Every effort should be made to resolve any issue that users have, whether that user is part of the Google Network, or a child wanting to play a game.

We find the company's hubris very disconcerting, and have to wonder if, as time goes by, this inattention to the simple needs and wants of its users will spell the end of the Googarithm, replaced instead with an arithm resembling a single digit from an outstretch hand. 

Wax



Disclosure: No Positions