Despite Its Hype, $GOOG is Undervalued

Every investor knows this tech giant’s name; in fact, they most likely used its search engine to find this article.  We’re talking about Google, Inc. (NASDAQ: GOOG).  From Gmail to YouTube, the company has its hands on every facet of the Internet – a user’s entire online experience can take place under the Google banner.  In the near future, the company will expand further into the hardware arena with innovative products like the Nexus tablet and Project Glass augmented-reality glasses.  Despite the hype that surrounds Google, shares of its stock are surprisingly undervalued, when looking at almost every measure under the sun.  Though the stock has grown almost 500% since going public eight years ago, it is very possible that its intrinsic value has accumulated to an even greater amount.  In other words, the company’s fundamental value is growing too fast for investors to keep up – which is not uncommon with large technology companies.  In 2012, GOOG stock has underwhelmed to a tune of negative 2.10 percent, though recent hedge fund activity has been sending bullish signals to investors, in addition to its favorable valuation metrics.


When analyzing Google’s fundamentals, the first valuation metric that immediately jumps out is Price-to-Earnings ratio.  The P/E ratio is a rather standard way to measure how investors are currently valuing a stock, and compared to the industry average P/E of 26.5X, GOOG’s P/E is a lower 21.2X, signaling the stock is undervalued.  This is an unprecedented low for the company; its 5-year average P/E has been 28.12X. Google is a high growth stock that deserves a higher valuation. Its Revenue-Per-Share has actually been increasing significantly, almost tripling in value over the last five years.

Looking to the future, we need to compare Google’s Forward P/E figures with its competitors.  While Google’s 2013 forward P/E is 12.6X, we can see Apple, Inc. (NASDAQ: AAPL) at 12.9X, Yahoo! Inc. (NASDAQ: YHOO) at 15.9X, Microsoft Corp. (NASDAQ: MSFT) at 10.6X, and IAC/InterActiveCorp (NASDAQ: IACI) at 15.3.  Let’s also compare GOOG’s 3-year average revenue growth with its competitors.  With this metric, GOOG has grown at 20.3 percent, AAPL at 42.4, YHOO at -11.6, MSFT at 5.0, and IACI at 12.5.  Of the bunch, Google is the second-lowest valued company in terms of Forward P/E, and it is the second-best in terms of revenue growth.  Clearly these two statements do not add up – better days are definitely on the horizon.

In Google’s case it is also worth looking at its Free Cash Flow, which is a measure of the cash that a company is able to use for R&D, acquisitions and dividends.  All three of these things are important to Google’s future success as it grows into a more mature player in the technology sector.  Interestingly, the company has grown its FCF rather substantially over the last 5 years, from $654 million in 2007 to $2.97 billion at year-end 2011.  This represents more than a 350% increase over this time, which is greater than YHOO (-12%), MSFT (+50%) and IACI (-74%), but less than AAPL (+1600%).  Though Google has not grown its cash hoard at the same rate as their biggest competitor in Apple, a 350% increase is nothing to shake one’s head at, especially given the fact that shares of GOOG are trading below their full potential.

Hedge funds love this stock – most likely due to some of the promising factors mentioned above.  As mentioned in this article, GOOG is a darling among the industry’s richest fund managers.  Chase Coleman, Stephen Mandel and Julian Robertson are the most well known names, and Coatue Management, Joho Capital, and Brave Warrior Capital all hold at least 15 percent of their 13F portfolios in GOOG – going against the typical ‘diversification’ mantra followed by most investors.  Heck, the bullish signals on the stock must be that good; a claim further supported by Insider Monkey’s new Billionaire Hedge Fund Index.  Out of the thirty stocks in this index, GOOG is the second most popular stock among billionaires.  All in all, investors should buy into Google, Inc. (GOOG) now, while substantial long-term returns can still be made.