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Google Inc (GOOG): Great Company, Red Flag Stock?

Google Inc (NASDAQ:GOOG) without a doubt is an astounding company that has changed all of our lives. Research that was impossible, or at least incredibly costly in time and money, is now possible, and at fractions of both. Outsiders probably know only a handful of things that Google is going to dazzle us with. From Google Fiber today, to self-driven cars and cyborg glasses ahead, Google Inc (NASDAQ:GOOG) brainiacs will unleash innovation after innovation, without a doubt.
Google Inc (NASDAQ:GOOG)

But, as with any public company, it’s a stock, too. Any choice to buy, sell, or hold requires scrutinizing earnings quality indicators that, if low quality, are good predictors of poor stock performance ahead. Days sales outstanding, or DSOs, which is the time it takes revenues to turn into cash in the bank, are job one in earnings quality analysis. And Google Inc (NASDAQ:GOOG)’s year-over-year quarterly increase in its DSO for seven of the last eight quarters raises eyebrows.

(Disclosure: My co-author John Del Vecchio and I were Authors@Google, and I intend no ungratefulness here to our most generous hosts. But I know that my Google friends expect no less than callin’ ’em as I see ’em.)

How long to get paid?
Days sales outstanding is calculated for our quarterly analysis as (accounts receivables/revenues) * days in the quarter.

Examine DSOs in two ways. First, look at DSOs year over year to correct for seasonal variations in a business. And then, to smooth it out to capture trends more accurately, take the LTM (last 12 months) average per quarter. If the latter increases consistently each quarter, there could be trouble for the stock, regardless of the overall market’s broad race to the sky that we’ve seen for the past four years. Look at eight quarters of LTM to perceive the trend over more time. And quarterly year-over-year comparisons can show poor trends that may show up in LTM numbers.

The following table examines year-over-year quarterly DSOs, and then the more important sequential change in LTM DSOs at four companies competing with each other fiercely in many areas: Google Inc (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Yahoo! Inc. (NASDAQ:YHOO)! . There’s clearly a big fifth in Facebook Inc (NASDAQ:FB), but we lack enough data for anything meaningful on DSOs so far.

Company and

Calendar Quarter

Q4 2012 Q3 2012 Q2 2012 Q1 2012
Google: Quarterly DSOs 48 46 45 45
Year-Over-Year +4 +3 +1 +1
LTM DSO Avg 46 45 44 44
Seq. LTM Change +1 +1 0 0
Yahoo ! Quarterly DSOs 67 76 74 74
Year-Over-Year +1 +7 +4 +1
LTM DSO Avg 73 73 71 70
Seq. TLM Change 0 +2 +1 0
Microsoft : Quarterly DSOs 52 74 67 64
Year-Over-Year 0 +7 +1 +1
LTM DSO Avg 64 64 63 62
Seq. LTM Change 0 +1 +1 0
Apple : Quarterly DSOs 19 24 19 19
Year-Over-Year +4 +6 0 (3)
LTM DSO Avg 20 19 18 18
Seq. LTM Change +1 +1 0 (1)

Sources: S&P Capital IQ and my calculations. Rounded.

Company and Calendar Quarter Q4 2011 Q3 2011 Q2 2011 Q1 2011
Google: Quarterly DSOs 44 43 44 44
Year-Over-Year +1 (1) +1 +3
LTM DSO Avg 44 44 44 43
Seq. LTM Change 0 0 +1 +1
Yahoo! Quarterly DSOs 66 69 70 73
Year-Over-Year +7 +16 +18 +19
LTM DSO Avg 70 68 64 59
Seq. LTM Change +2 +4 +5 +5
Microsoft: Quarterly DSOs 52 67 66 63
Year-Over-Year 0 +2 +3 0
LTM DSO Avg 62 62 61 60
Seq. LTM Change 0 +1 +1 0
Apple: Quarterly DSOs 15 18 19 22
Year-Over-Year (5) (2) +1 +2
LTM DSO Avg 19 20 20 20
Seq. LTM Change (1) 0 0 0

Yahoo! Inc. (NASDAQ:YHOO)’s LTM DSOs have been steadily improving. This has corresponded with a rising stock price; but whatever turnaround may be happening, it doesn’t change the fact that the stock is absurdly priced by the market at 11 times EV to LTM EBITDA and, gulp, 30 — yes, thirty! — times market cap to LTM-levered free cash flow! Steer clear.

Microsoft Corporation (NASDAQ:MSFT)’s steady year-over-year increases don’t look as significant when smoothed through the LTM average. Microsoft is cheap at seven times EV to LTM EBITDA, and 11 times market cap to levered free cash flow, but we’ll next see that Apple is cheaper. Which company would you bet on for any multiple expansion (where the market will pay a higher multiple of EBITDA or free cash flow for the business value)?

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