Will Google Inc (GOOG) Do Better Next Year?

2012 has been a wild year for Google Inc (NASDAQ:GOOG). Its stock price began the year close to $670 per share, and even as the market rose in the first few months of the year the price dropped and was as low as $570 in early July. It then climbed to about $770 three months later before a disappointing earnings release- in both content and in style, with the report being released hours earlier than scheduled- has brought the stock right back to the $670 range, flat for the year.

Looking more closely at Google Inc (NASDAQ:GOOG)’s 10-Q, we see a 19% increase in revenue in the core Google business (which is focused on advertising) compared to the third quarter of 2011 as well as the addition of the Motorola Mobility Holdings business, which is intended to further strengthen Google’s position in the smartphone market. However, that segment seems to be unprofitable, and with a 31% increase in cost of goods sold in the advertising business earnings ended up falling by a total of 20%.

LONE PINE CAPITAL

At a market capitalization of about $220 billion, Google Inc (NASDAQ:GOOG) trades at 21 times trailing earnings. That kind of pricing indicates that the market expects considerable growth from the company going forward. Certainly the decline in net income caused by adding the Motorola business likely won’t be duplicated next year, and even if that business doesn’t improve Google should get some earnings growth out of its search engine related businesses. The forward P/E is 14, which would be a fair- and possible low- price for a large, growing pantechnology company with a strong brand and sizable market share in smartphones and tablets.

Google Inc (NASDAQ:GOOG) had taken the #2 slot in our rankings of the ten most popular stocks among hedge funds in the second quarter of the year, finishing only behind Apple Inc. (NASDAQ:AAPL). One of the funds contributing to this positioning was Lone Pine Capital, which is managed by billionaire Stephen Mandel. Lone Pine, which initiated a position in Google during the second quarter of 2011, increased its stake by 2% between April and June to a total of 1.3 million shares (see billionaire Stephen Mandel’s latest stock picks).

Google’s peers include Apple, Microsoft Corporation (NASDAQ:MSFT), Facebook Inc (NASDAQ:FB), and Yahoo! Inc. (NASDAQ:YHOO). Apple and Microsoft both carry forward P/Es of 9, though in the case of Microsoft it’s important to keep in mind that the release of new versions of Windows and Office will likely temporarily boost earnings as businesses and other customers more or less automatically upgrade. Microsoft’s revenue and earnings were down last quarter from a year earlier, though again this may be because purchases are being delayed. Apple’s pricing is harder to explain, and with that company’s business performing well we thought that the correction in its stock price had presented a good buying opportunity. Read our recent analysis of Apple.

Facebook has been trading around $20 for some time after the decline from its IPO price slowed at about that level. It’s still priced quite high- at 31 times consensus earnings for 2013- and we wouldn’t buy the stock, even though we’re keeping an eye on its financial performance and on its cash hoard. Yahoo’s recent earnings are skewed due to a recent sale, but we’d note that the company’s revenue came in lower last quarter than a year earlier as well as the fact that its forward earnings multiple actually represents a premium to Google (that P/E is 15). We’d avoid that stock as well.

Google Inc (NASDAQ:GOOG) doesn’t look like as good a buy as Apple. However, we could certainly see it make progress in integrating its recent acquisition and coupled with improvements in its core business that could easily push it into “growth at a reasonable price” territory after a quarter or two.

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