Sometime You’re a Sap For NOT Buying: Entry Point for Google?
Google (GOOG) long ago forfeited its title as the hottest startup company in Silicon Valley, and even its status as the iconic tech IPO of the 21st century has been challenged. But now, as January ends with data showing that investors are continuing to direct billions of dollars of new capital into the U.S. stock market – in defiance of weaker-than-expected GDP estimates for the fourth quarter – the question becomes whether Google, as one of the market’s most widely-held stocks, is as attractive today as a mature company, and hard on the heels of some impressive gains, can still be seen as being as alluring an investment prospect as it was in its early years as a publicly-traded company?
Google is the focus of our fourth and final installment in our short series of articles devoted to the question of whether it is the saps that are driving the market higher; prior installments focused on JPMorgan (JPM), Pfizer (PFE) and Chevron (CVX). It’s a timely question: Lipper reported yesterday that stock mutual funds attracted another $5.8 billion in the week ended January 30, bringing their four-week total net inflows to an astonishing $20.7 billion, the highest level recorded since the period ended April 12, 2000. That’s about the time that the dotcom bubble burst – and years before Google was able to go public. In the past week, stock ETFs (or exchange-traded funds) joined the party, pulling in $6.9 billion of new capital from investors, bringing the week’s total net inflows to a jaw-dropping $12.7 billion.
Google is almost certainly one of the big beneficiaries of that inflow of capital. It is a large-cap stock, highly liquid and a key player in the ongoing battle over which approaches will triumph in the world of mobile computing, from devices to applications. Using Google-owned Android operating systems on a smartphone, you can get into your Gmail (Google) e-mail account or update your friends on your latest achievement via Google +, the company-developed social networking platform. More recently, the company has pushed into the realm of hardware. As for its core search engine business – well, there is a reason why the phrase “to Google” has become shorthand for looking up something online.
Like other companies, Google took a beating during the financial markets crisis of 2008 and the aftermath, but since the market trough in March 2009, the company’s stock has outperformed the S&P 500, rallying 137% compared to 110% for the S&P 500. Google is closer than ever before to matching its record high, set in late 2007. Does that make those of us who get in now, saps? After all, as Warren Buffett has pointed out over and over again, smart investors jump into stocks when everyone else is fleeing; when the love affair is at its height is the time to head for the exit.
Of course, the real saps in this case were those investors who didn’t buy into Google’s August 2004 IPO; buying and hanging on to it since then, through all the volatility, would have produced a 653% return over that 8 ½ year period. The S&P? Well, thanks to that nasty hiccup in 2008, it would have earned you only 37.3% over the same timespan.
Google is a particularly interesting case study for us because of the pattern of its gains. Although it has outpaced the S&P 500 in the post-crisis recovery period, and so far in 2013, those gains haven’t been consistent. At times since the spring of 2009, investors would have done better to own the broad market index; at others, to hang on to Google. The same is true for January’s performance: while the month ended with Google up 4.5% compared to the S&P 500’s 2.44% advance, the technology giant lagged the market significantly and for several days midway through the month. It reflects a degree of ambivalence on the part of investors to Google’s stock that a careful investor may be able to exploit.
If Google’s share price has been volatile, its financial metrics seem to be improving steadily, and Wall Street’s sell side analysts are calling for its revenues and earnings per share to grow at rates in the mid-to-high teens, in percentage terms. Even profit margins – which remain a source of concern – are edging higher once more. That is a healthy growth rate for a company that is no longer a high-growth startup but a mature player and one of the largest technology companies in the world. Indeed, it is impressive that its forecast earnings growth is almost double the average of just above 8% that is the historical aggregate for companies in the S&P 500 index. That above-average growth forecast serves to justify the valuation premium it commands over similarly mature technology companies like Microsoft (MSFT) and Yahoo! (YHOO), with the latter’s PE ratio depressed by its ongoing turnaround and strategic overhaul.
The key question is how well Google can manage the transition to mobile computing. It has shown that its Android operating system is a winner, but as you and I perform more of our Internet searches on our smartphones or tablets, advertisers turn increasingly to mobile ads, which happen to be significantly cheaper than those on desktop units. The company’s recently-announced fourth quarter results, however, revealed some improvement on that score: while analysts had forecast a drop of as much as 12% in the average price advertisers paid per click on an ad on a Google website, the actual decline was only 6%. To the extent that consumers opt to use their tablets rather than smartphones, that will be good for Google, since tablet ad rates are slightly higher.
The stock market’s recovery from the 2009 trough and its most recent January rally has left investors with fewer real bargains to unearth. (By real bargains, I mean stocks that are still trading at a discount and yet have few real legacy issues or impediments to above-average growth in revenues and profits – not just stocks that happen to be cheap or that haven’t participated in the rally.) The truth is that there is little low-hanging fruit left, and Google is no exception to the rule. You may want to kick yourself for being a sap and not buying this or the other widely held blue-chip stocks we’ve discussed months ago, but that is 20/20 hindsight.
Today, the question becomes whether you would be a still greater sap to buy at current market valuations, or to retreat to the sidelines and await a better opportunity that may never arise. In the case of Google, some of the trading trends – with the stock now lagging, now leading the S&P 500 – suggest that there might be a time when it becomes more attractive, at least on a relative basis. But there’s no reason to suppose that the above-average growth in profits and revenues will evaporate overnight, or that Google won’t remain among the primary beneficiaries of whatever new technology world is created as tablets and smartphones crowd out the venerable personal computer.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
Filed under: Company Analysis