Sunday, June 19, 2011
GOOGLE: TIME TO BUY?
Recently Google (GOOG) shares have been in a prolong slump. Since January 19th when shares hit $640, the stock has lost 24% and settled at $485 at Friday's closing bell. Shares have not seen these prices since September of 2010.
Lets take a look if Google is a screaming buy, a hold or a sell:
Pros: (Q1 2011)
- P/E of 18.8; P/E of 12 for estimated 2011 EPS.
- $37 Billion in cash on balance, approximately $114/share.
- $7 Billion FCF.
- PEG of .75.
- Projected earnings growth of 15% in 2011 and 2012.
- Robust growth with the Android operating system.
- International revenue up $6.4 Billion
- Continued investment in R&D.
- Revenue growth of 27% yoy, 2% qoq.
- Uncertainty with Larry Page as CEO.
- Google has gone on a hiring spree; lower margins and more expenditures.
- Increased competition from Apple, Microsoft, Yahoo and Baidu.
- Slower growth than in the past (15% compared to 30% in past).
- Worries Google is branching out into too many sectors.
Google is still Google and it's still the king of online search engines. The company appears to be severely undervalued relative to its competitors. As a tech stock, Google has a P/E of 18.8 and a PEG of .75. Google appears to be undervalued relative to other tech competitors and is priced like it is a stable giant with no more room for growth.
Yet there is much more room for growth. Google has nearly $7 Billion in free cash flow and they have invested heavily in research, development and new hiring. They have enough cash to swallow up innovative new tech companies and to continue with further research. International revenue has also increased and now 53% of the company's revenues come from non-U.S. markets. Current estimates show that Google will continue to grow at 15% in 2011 and 2012, growth rates that are nothing to be down on.
Google's Android OS looks to be giving Apple a run for its money. Samsung's new phones will operate with Android and demand will continue to rise. With such large amounts of FCF, the company is able - and willing - to continue to spend on R&D for the future.
Many investors are also hesitant about the direction Larry Page is taking the company. Page is no slouch, he is investing heavily in research and development to position Google for the future. The company has continued to branch out in many sectors and they still have many of the most innovative individuals in the tech industry.
To conclude, Google trading at $485 appears to be a steal. The company has garnered a lot of uncertainty the past few months due to a new CEO and branching out into other sectors, yet the company is setting itself up for the future. It was not long ago the company was trading well north of $600 and the current slump has presented a clear buying opportunity.