Are People Too Bearish On Google?

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With shares of Google Inc. (NASDAQ:GOOG) trading at around $714.98, is GOOG an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Let’s get the “bad” news out of the way first. There has been considerable insider selling at Google over the past six months. However, if you look at the past few years, there is always considerable insider selling at Google. The reason people get nervous is because the amounts are so high, but keep in mind we’re talking about company with a market cap over $235 billion, not a small-cap where insiders are going to sell shares for a few thousand dollars. The next concern is bearish option bets. Bearish option bets are at an eight-year high for Google. Some people might see this as a reason to worry, but it’s important to note that you should never look too much into option bets because they’re often used as hedges.

Google bears might want to point out that Google is losing momentum in the mobile ad space area. Sure, Google might be losing a little momentum, but its revenue in the space still dominates Facebook (NASDAQ:FB). It has been projected that Facebook will soon pass Google for mobile ad revenue. I don’t see this as likely. Even if it does happen, Google will likely regain market share in short order. This is a company that never backs down from a fight, and it almost always wins. Facebook has proven many people wrong with its recent successes. I must admit that I was one of them. However, I can’t get around the “active user” number. Facebook likes to state that it has 1 billion active users per month. That might be true, but only by Facebook’s definition of active users. The company considers active users as anyone who visits the site, as well as anyone who engages the site through application protocol interfaces through a third-party site or tool. Therefore, anyone who clicks on a Like button from a blog is considered an active user. The real active user number is much lower than you think if it only pertains to people visiting Facebook.com. The point here is that Facebook might be proving people wrong at the moment, but in the long run, it won’t be capable of manipulating its way past Google in any area for a sustainable period of time.

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A lot of attention is often given to Facebook insiders, but let’s not forget that Google is quietly run by brilliant and innovative people. For example, look at Google Glass. Not only is this a brilliant creation, but Google is now looking to expand on it. Google recently applied for a patent to project images like a keyboard and other images on Google Glass.

Google won’t stop there. Google is also attacking Apple (NASDAQ:AAPL) in the music space. Google will offer a music service that will allow customers to buy over 13 million songs from the Android market. Google is making an aggressive play at taking market share away from iTunes, which is the last thing Apple needs right now. From a business standpoint, Google’s timing to attack a company while dealing with a lot of negative publicity is wise.

Now let’s take a look at some important numbers for Google.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for Google are both very strong. The same can be said for Facebook. Based on all the money available for innovation and growth in existing areas, these two companies will be duking it out for many years to come.

Debt-To-Equity

Cash

Long-Term Debt

GOOG

0.09

$45.72 Billion

$2.99 Billion

FB

0.04

$10.45 Billion

$530.00 Million

YHOO

0.01

$8.41 Billion

$127.53 Million

 

T = Technicals on the Stock Chart Are Strong

Google has outperformed Yahoo (NASDAQ:YHOO) over the past three years. Google has also outperformed Facebook over the past year, which shouldn’t come as a surprise considering Facebook’s IPO debacle.

1 Month

Year-To-Date

1 Year

3 Year

GOOG

1.85%

1.07%

14.40%

23.27%

FB

11.63%

12.44%

-0.56%

-0.56%

YHOO

2.04%

0.70%

29.46%

19.14%

 

At $714.98, Google is currently trading above all its averages.  

50-Day SMA

695.43

100-Day SMA

704.57

200-Day SMA

655.44

 

E = Earnings Have Been Steady

The numbers below are exactly what you want to see when you’re invested in a company long-term. Google has seen consistent annual earnings and revenue growth.

2007

2008

2009

2010

2011

Revenue ($)in billions

16.59

21.80

23.65

29.32

37.90

Diluted EPS ($)

13.29

13.31

20.41

26.31

29.76

 

When we look at the last quarter on a YoY basis, we see an increase in revenue, but a drop in earnings.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

9.72

10.58

10.64

12.21

14.10

Diluted EPS ($)

8.33

8.24

8.75

8.42

6.53

 

T = Trends Support the Industry

Google dominates its industry and is now looking to move into many other industries. When there is good management and plenty of cash flow available, anything is possible. The sky is the limit. Google will not eliminate big competitors like Facebook and Apple. Instead, big companies like these who are looking to continuously expand into anything online-related will roll over smaller companies without a unique niche.

Conclusion

Google has a ton of cash flow, a lot of creativity, excellent margins, and a Forward P/E of 15.43. Wouldn’t it be nice if you could go back 30 years and buy a company that is now a Blue Chip? What if you could buy on a dip because of short-term negativity? Wouldn’t that be ideal? Google might be that opportunity now. There is little doubt that Google will be known as a Blue Chip 30 years from now. Few companies, if any, are better positioned to capitalize on current technological advancements and trends. Also remember that Google has the ability to acquire smaller players in order to expand its reach.

Google is an OUTPERFORM.

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