john@johnducas.com

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Google: The $1000 Stock?

From what I have seen, opinions are currently mixed for Google’s stock. Some think it will reach the 1,000$ milestone and others think its bound for the same scenario as Apple.

In this article, I will be going through many different aspects of the tech giant to determine if it has the potential to continue to thrive.

 

Google ($GOOG) has been on a complete tear for the past few years, and its growth just keeps accelerating. This year alone it is up about 25%, outpacing both the S&P and most of its rivals. Even more impressive, in the past year it has been up an incredible 50%.

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This chart shows the growth over the past year; to me it just has growth spelled all over it. It’s been on a continuous uptrend, with higher highs and higher lows.

 

Google’s grew its revenue by over 30% and grew its earnings by about 16% compared to a year ago.

 

Recently, Google encountered a small bump on the road when reaching an all time high of 920.6$. Luckily, I personally managed to get out before the fall so I could buy back my shares at a lower price. It then declined to about 860$. One thing that I have realized when being invested in Google, is that you always need to take caution if its stock rises too quickly in a short period of time.

 

Valuations

 

Google’s P/E currently stands at around 26. This is a relatively high number compared to companies like Microsoft (17.4) or even Cisco (13.55). This proves that Google is priced higher than other stocks in its sector. The question is if its going to be able to sustain further growth.

I will also try to go more in depth about what the fair value of the company is. Based on the 2012 annual report (I wasn’t able to use the 2013 numbers since the annual report hasn’t been published yet), the WACC (Weighted Average Cost of Capital) stands at 9%. Google’s CFO (Cash flow from Operations) is 16,619,000. Its Capital expenditures are 3,273,000. Now we can calculate the FCFF.

 

I created a table and input all these numbers so we can clearly see the ones we need.

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From these calculations we arrive to the conclusion that the fair value for Google stock is 1,052$ per share, which represents an upside potential of about 15% from a current share price of 900$.

 

 

Android

 

In 2005, Google bought Android and has developed it to be a main player in the smartphone operating system industry. A big competitor to Android has been Apple, but this is slowly changing. Apple did ship 37.4 million iPhones in the first quarter of the year, which is more compared to the 35.1 million during the same period last year. But Apple’s growth in shipments has been declining and so has the market share of its mobile iOS system.

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Smartphone OS Market Share

 

 

This chart clearly illustrates Android’s dominant market share relative to iOS and other mobile operating software. Android keeps increasing its market share by 15.9%, year over year. In Europe, Android dominates the marketplace with 70% compared to the meager 18% for iOS. Another report done in July of 2013 stated that Android made up 64% of the global smartphone market in March 2013.

 

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Android’s growth has been tremendously speeding up, and there is no sign of it stopping. According to Eric Shmidt who is Google’s chairman, he finds that ‘Android’s future growth lies in the success of cheaper phones sold in emerging markets’. He expects the ‘number of phones running Android to reach 1 billion by the end of 2013 and 2 billion in a year or two’.

This is mainly the cause of lower costs to sell Android phones with today’s technology, this will consequently open up the road for the distribution of these phones to poorer emerging markets. Google but mainly Android’s call goal according to Shmidt is to ‘reach everybody’.

 

 

Products

 

wqSearch is what really makes Google, it is why it was developed in the first place. During the 4th quarter of 2012, search was up 20% despite declining pc searches. This goes to prove that either youtube or mobile search was up. As you can see by this table, Google is set to continue devouring search ad revenue and steal it from other companies. Bloomberg noted that ‘Google’s success in mobile search and advertising, especially relative to competitors like Facebook and Groupon, gives Google a solid lock on both present and future revenue.’

 

 

Later on this year, Google is set to open its own stores, much like Apple and Microsoft. It will feature many of its products including the nexus and chromebook. Numbers for the sales of chromebooks still haven’t been released, but for having Wal-Mart, Staples and all the other retail outlets to be interested must at least be decent enough to sell them. The chromebook is still pretty new, but should attract many customers. For those of you who don’t know what the chromebook is, it is essentially a low-end 199$ laptop which runs Google’s Chrome OS only. It is so popular that it always seems to be out of stock on Amazon. It also slowly made its way towards the education market, where more than 2000 schools have embraced the machine.

It doesn’t stop here, the possibilities for growth from here are close to endless. Now Google can easily expand to the developing market. Acer is one of the manufacturers of the chromebook, revealed that they have sold more chromebooks

 

Google glass- either you love it, or you hate it. I honestly love it, not from a short-term standpoint, but more in the long term. I mean, who wants to wear a pair of awkward looking glasses that look like you just came out from a star trek movie. What I love about this product is what it will bring in the future, sure, it will be a flop when it comes out. But slowly Google will start to enhance it and make it more convenient for people and the consumer. And once it catches on, Google will be able to create its own sort of eco-system, much like Apple’s. But this will only affect Google’s stock price in the long term.

Along with this innovation, Google is working on Google Fiber, which is an experiment to deliver broadband Internet, which offers connections of up to 100 times faster than current providers. Don’t forget there’s also the self-driving car, which is most certainly going to be a revolution in itself, and also its own line of touchscreen tablets to compete with Microsoft.

All of these future products could easily become their own billion-dollar revenue stream.

 

 

Google, not Apple

 

You may recall what occurred starting from September of 2012. That was the start of the plummeting of Apple’s stock and it shedding nearly 40% of its value. There were many causes for this but some of them were that it had grown to far to fast, it couldn’t sustain its growth and that it had no products to keep up with the increase in stock price. Many people fear the same thing will happen with Google.

Frankly, this is not the case with Google. Apple was a losing company, their main source of revenue which was the iPhone, wasn’t attracting enough customers to keep up with the expectations.

Google on the other hand just keeps innovating. It always invests and buy other companies to in a way, keep up to date and try to stay ahead of the competition, Google glass being an example.

 

Conclusion

 

Google is good for a short and long term investment. In the short term, I can see it climb to 950$, but that’s when I would start selling. After that I would expect another bounce and off to the 1000$ milestone, where its fair value is.

Even if some people consider Google to be a bubble, now would be the time to buy. Like George Soros said, ‘when I see a bubble, I buy’. Speaking of Soros, he finds Google a great long term pick.

To me, Google is not much of a value play any longer, if you considered it so, then the upside on that front would be minimal. Google has become much more of a growth stock with a lot of potential to continue to succeed and thrive.

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