The other week, after Google (GOOG) reported blowout earnings (see conference call transcript here), shares spiked to over $650 in after hours trading; the earnings announcement was quickly followed by the news that CEO Eric Schmidt would be stepping down from that role, putting the company back in the hands of co-founder Larry Page. Shares quickly retreated, spooked by the uncertainty, and have continued to fall to their current price of about $610.
Markets detest uncertainty but ignoring earnings to focus instead on the change in leadership seems silly and overdone. This change at CEO will not have material impact on revenues or earnings and the company is still in good hands. Long-term investors should take advantage of this overaction to headline risk and add to positions. Here's why:
Google's Numbers
During the most recent quarter, Google pulled in $6.4 billion in revenue and $8.75 per share in earnings. If we assume zero growth over the next three quarters, we'd be looking at a revenue run rate of $25.6 billion and earnings per share of $35 for the coming year. That would translate to price to sales of 7.5 and a P/E ratio of 17. This is assuming zero growth over the next three quarters, which is highly unlikely. Shares look even more affordable given the $35 billion in cash that Google has sitting on its balance sheet. Analysts project that Google will grow revenues at about 22% over the coming year, putting the PEG ratio at less than 1.
With Google's history of growing revenue and earnings (often far exceeding consensus), shares seem to be trading at a steep discount to growth and compared to valuations applied to other major internet companies, such as Amazon (AMZN( and Facebook. The numbers for Facebook are less clear but we know that Amazon is trading at nearly 70 times TTM earnings and 35 times projected 2011 earnings.
What's to Come
Search remains Google's bread and butter but the company is quickly expanding across the web. YouTube remains the dominant site for online video viewing and the company is now monetizing over 2 billion video views per week.
The Chrome web browser has already jumped to about 10.7% market share and continues to gain. While Chrome is not a big money maker for Google it provides the company with a lot of valuable data and also drives increased search numbers by having Google as the default search engine and due to the nature of the "omnibox". The browser looks poised to continue taking market share from IE, Firebox and Safari.
Data came out this week showing that Google's mobile operating system Android is now the most used mobile OS in the world for smart phones, better than Apple (AAPL), Nokia (NOK) et al. This is a hugely impressive feat for an approximately three year old OS. Google offers Android free of charge so once again it is not a big revenue driver but it helps ensure that the company will play a dominant role in mobile search and will lead to increased monetization over the years and decades.
Despite the Chinese government hacking Google in early 2010, Google still has business in China, taking about 20 percent of the search market by revenue (according to Baidu's (BIDU) recent earnings release). All those who counted Google out of the world's most populated country should take a second look.
Google is also rapidly gaining market share from Yahoo (YHOO) in display advertising, which now accounts for about 10% of the companies revenue.
Google also has its hand in some far flung industries such as geothermal power, wind power, medical record keeping, voice recognition, cloud computing, TV and much more.
With all these positives going for Google, I would recommend that longer term investors own shares at these levels. Google 3.0 should be just as exciting as the younger Google was, and may even surprise us in all sorts of ways.
"Holdwork"
Investors need to know whether they are truly investors or closet traders. There is never a clear answer wether to double down or cut your losses and it's often wise to either take profits off the table or have tight stops to prevent large losses; but with that said, investors who know that they've found the right company, the one that is truly dominating, are wise to double down and - most importantly - hold! It can be hard work to stick with your winners. It's called "holdwork".
With Google I think we have a company that is truly dominating and is grossly undervalued. Conservative estimates value it at only about 15 times 2011 earnings. Imagine 2015! Even if traders aren't on board right now, investors should do very well with this stock over the years.
Disclosure: I am long GOOG, AAPL, BIDU.
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