How Does Google Inc (GOOG) Look Right Now?

Google Inc (NASDAQ:GOOG) lost about $60 per share in value- billions of dollars- when a mistake caused the company’s poor quarterly report to be released early. The stock has continued to fall in price, though at a fairly slow rate, and is now up only 1% for the year. It’s still considerably higher than its levels from the summer, which were closer to $600 per share, and the market capitalization of about $220 billion means that it is still one of the largest-cap U.S. technology stocks.

Google Inc (NASDAQ:GOOG)’s core operations, focused on advertising, brought in 19% more revenue last quarter than in the third quarter of 2011. This was in line with that segment’s performance in the first half of the year; the first nine months of 2012 have had the top line for Google-branded services come in 21% higher than the same period last year. The Motorola division, which was generated from Google’s purchase of Motorola Mobility completed in May of this year, turned in $2.6 billion of revenue in the third quarter but costs of goods sold were $2.1 billion. If R&D and SGA expenses are allocated between the two divisions according to their % of revenue, we calculate that the $900 billion share attributed to Motorola makes it unprofitable (and note that this is even the case if we assume that Google Inc (NASDAQ:GOOG)’s previous operations consume more than a proportional share of these expenses).

LONE PINE CAPITAL

Because of high costs, earnings fell 20% from the same period in 2011. Google Inc (NASDAQ:GOOG) now trades at 21 times trailing earnings, and with the sell-side expecting it to resume double-digit growth rates next year the forward P/E is 15. In theory, even if Motorola continues to struggle it shouldn’t become more unprofitable, leaving Google’s advertising services to drive net income higher- of course, this would require a halt to what seem to be falling pay-per-click rates.

Google Inc (NASDAQ:GOOG) was one of the ten most popular stocks among hedge funds in the second quarter of 2012 (see the full rankings). One fund which liked the stock- and actually increased its position, to a total of 1.3 million shares at the end of June- was billionaire Stephen Mandel’s Lone Pine Capital. Find more stocks that Lone Pine liked. Keep in mind that even after its recent decline in price Google’s stock is up 16% from the end of June, easily beating the NASDAQ index.

We think that Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) are the best peers for Google Inc (NASDAQ:GOOG). Apple, while technically missing estimates, had a good third quarter as its revenue and earnings were both more than 20% higher than the same period a year earlier. A trailing P/E of 14 is normally enough for us to consider a stock a good value on its own; adding in the high growth rates makes us even more bullish on the company. Read more about why Apple is still a value stock. Microsoft’s numbers haven’t been great recently, with earnings lower last quarter than the same period in the previous year, but we understand that some customers are delaying purchases of Microsoft products until new versions of Windows and Office are released. Microsoft’s forward P/E multiple- which likely includes slightly skewed-upward earnings from these delayed purchases- is only 9. We would hold off on buying for now, but would consider getting in on a pullback in the stock price.

Much of Google’s operations is still supported by advertising, and so we think that Facebook (NASDAQ:FB) and Yahoo (NASDAQ:YHOO) are also comparable companies. Facebook’s poor post-IPO performance, as well as slowing growth, has left the stock at 34 times forward earnings estimates (and we worry that the Street consensus may be being a bit generous). As a result we’d continue to avoid Facebook. Yahoo’s trailing earnings are artificially high because of the recent Alibaba sale; its forward P/E multiple is 15, which is even with Google’s. We’d generally rather own Google at the same pricing, though we are worried that the sell-side is being more optimistic with its earnings projections for that company.

We don’t think that Google is a better buy than Apple right now. We’d put it in the same category as Microsoft- on a forward earnings basis it seems like a good value, but we’d need more information to make sure that it can deliver on hitting those targets.

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