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.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!