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Hedge Funds Sticking with Google Inc (GOOG)

Once again, as was the case in the first quarter, Google Inc (NASDAQ:GOOG) was the second most popular stock among hedge funds according to the 13F filings for funds tracked by Insider Monkey. This was the case despite- or perhaps because of- the stock’s 10% decline during the second quarter. Google hasn’t gotten as much media attention recently as it’s been used to, with fellow technology companies Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) escalating their war as Microsoft moves into the tablet space along with online retailer Amazon (NASDAQ:AMZN). Google’s Android system has made inroads against the iPhone, but for the most part investors still treat the company as a search engine which engages in a number of peripheral activities (Gmail, Google Plus, and so on). Even Google’s own tablet announcement doesn’t seem to have gotten as much buzz as Microsoft’s.


Excluding Motorola Mobility Holdings revenues (Google acquired the company earlier this year), Google Inc (NASDAQ:GOOG) reported a 21% increase in revenues in the second quarter compared to the same period in 2011. Earnings for the whole company rose by 11%. Over the first half of the year, revenues ex-Motorola have risen 23% and total company earnings are up 32%. So while the Motorola acquisition seems to be putting a damper on Google’s margin- and it shouldn’t be too surprising for hardware operations to have a lower margin than software- the company is still achieving good growth. Google, of course, is still generating enormous cash from operations: nearly $8 billion in the first half of the year. Even with spending nearly $10 billion on acquisitions, free cash flow was over $5 billion. Perhaps the company will follow Apple in paying a dividend to shareholders (Cisco (NASDAQ:CSCO) has also recently announced a large increase in its dividend); at the end of the quarter it reported $43 billion in cash, cash equivalents and marketable securities versus the company’s $220 billion market cap. Despite the recent growth, Google trades at 20 times earnings, which doesn’t seem appropriate for such a fast-growing company which is so dominant in its primary business. According to analyst estimates, the forward P/E is 14 and the five-year PEG ratio is 1, which means that Google is on the verge of becoming a value stock. And with a beta of 1.2, Google has a lot of exposure to the broader market but not as much as many other technology companies.

Not only did Google Inc (NASDAQ:GOOG) remain the second most popular stock among hedge funds in the second quarter, it saw interest from some big names. Lone Pine Capital, managed by billionaire Tiger Cub Stephen Mandel, slightly increased its position to 1.3 million shares (see other stocks owned by Lone Pine Capital). Fellow Tiger Cub Chase Coleman’s Tiger Global Management slightly reduced its position but still owned about 900,000 shares. A big increase came from Lansdowne Partners, where the investment team led by Steve Heinz and Sir Paul Ruddock increased the fund’s position by 40% to about 920,000 shares (find other stocks in Lansdowne Partners’ portfolio).

Apple and Microsoft, as fellow pan-technology companies, are Google’s closest peers. Apple trades at a trailing P/E multiple of 15 and a forward P/E of only 12, so compared to its earnings stream it is even lower valued than Google. Apple is the leading player in tablets and a major player in smartphones, and has seen large growth in its financials recently for such a large company. Microsoft is similar to Apple on a trailing basis; analysts expect higher growth in the company for the near future, giving it a forward P/E of only 9, but we think much of this expected growth will be a short-term bump from sales of the new versions of Windows and Office. The five-year PEG for Microsoft is 1.1, competitive with Google’s. We should also mention Yahoo (NASDAQ:YHOO), which trades at 13 times forward earnings, though in this case Google clearly has a better brand and very likely a better mix of services for a similar forward P/E. Apple’s valuation metrics are appealing, but we would like to see how it handles increased competition before buying. For now, we would recommend that investors follow in the path of Lone Pine and Lansdowne and go long Google Inc (NASDAQ:GOOG).

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