Negatives Mount on Google Stock, and That May Translate into a Buying Opportunity
Google (GOOG) and its sideways share price hasn’t been a very gratifying investment in recent years, and its prospects just ahead are inciting more selling than buying. But Google remains a must-have share for any long-term portfolio. And while its share price now is no grand bargain, this buying opportunity may be as good as it gets.
As an investment, Google’s performance lately is an embarrassment in the shadow of its overachieving competitor Apple (AAPL). This year alone, Google shares are down more than 7% while Apple has risen more than 40%.
But Google remains the second most important stock in fundamentals-driven hedge funds, given only slightly less weight than No. 1 favorite Apple, according to a Goldman Sachs (GS) reports. While there hasn’t been a lot of interest in Google shares in recent weeks, they still hold buy ratings from many analysts. No one officially recommends selling them. YCharts Pro gives Google a high score for fundamentals although a below average rating on share price value.
The recent selling traces back to Google’s fourth quarter earnings report that missed a profit forecast by almost 10%. That mistake particularly upset a rather large number of options traders who had bet on a results report that would boost the share price. Google blamed foreign currency issues and a big move into lower-margin mobile technology.
Nevertheless, we are not talking here about the kind of disappointment investors feel when they discover that the folks in charge aren’t up to the job of growing a company. Google revenue rose 25% over the past 12 months, and its EPS is up slightly more than 5%. Those gains just didn’t quite rise to analyst forecasts.
The problem investors see is that Google’s revenue growth will slow further, and its profit margins will shrink more, as more people use Google services on handsets instead of PCs. (Ads viewed on phones sell for less.) Google profit margins definitely have come down as a lot of us spend more time with our smartphones.
But perhaps we’re taking these details too seriously. Despite its behemoth $199.5 billion market cap, Google will surely continue to be a growth company. As the giant in internet search, online advertising, ecommerce, social media and smartphone systems, it has big stakes in some of the fastest-growing technologies on the planet. Even spending on Google’s most old-school revenue source, search-based advertising, grew 22 percent in the U.S. last quarter. Analyst forecasts call for 22% overall revenue gains and 17% profit gains in 2012.
Then there’s the cash. Google has more than $45 billion in cash and short-term investments. It’s a preposterous war chest that only three other non-banking companies top. So if the grumblings from shareholders grow too loud, Google will have no problem: a) buying a growing business to fund share price gains; b) buy back some shares; c) pay a dividend; or d) all of the above.
Still, a superficial look at Google’s share price valuations might give a value investor a big yawn. They are considerably more expensive than those from Apple, a company that’s expected to grow at twice Google’s rate. (And also pulled off a 64% share price rise in the past 12 months, compared to Google’s 8%.)
Details, again. Google may just be the very rare company whose big picture can overshadow any doubts the traditional indicators throw out. Because between Gmail, Chrome, YouTube, calendars and Android phones, few of us can get through a day anymore without holding hands with Google. Even Apple can’t make that claim. That’s not the kind of reach, or the kind of potential, investors usually find on sale.