Realistically the sky is the limit for Google (GOOG), as can be seen through the technical and fundamental aspects of the company. Skeptics may point to an already active upward price movement and the new CEO appointment of Larry Page as potentially creating resistance, but that argument lacks foresight. Yes, Larry Page is untested in the waters as Google’s CEO, but what management has been able to accomplish with Google gives the company a strong backing. In the midst of competitors trying to knock Google down, the company has been able to generate majority market share throughout the US and UK in the search engine sector as well as create ever stronger operating efficiency, growing cash flows, innovation, and strategic acquisitions to fuel its growth.
Management's striving toward growth by implementing strategic acquisitions in order to fine tune their business models may hurt EPS in the short run, but this is no cause for concern to shareholders with a longer-term perspective. The innovation factor to Google is again based around its strong cash flow from operations and free cash flow generation, but to some this could be a cause for concern. It may seem that the cash is merely sitting on the Balance Sheet with no movement to either shareholders or reinvestment. Google obviously knows what it is doing and the cash reserve kept on the books is most likely due to the tough economic times and will be allocated efficiently in the near term. With respects to Google’s competitors, it is a valid point to say that there is activity at the bottom striving to obtain market share. The only problem is Google has no intention of giving it up. What others must do (Microsoft (MSFT) and Yahoo (YHOO) specifically) is create value to the consumer in their search engines that exceeds what Google is bringing to the table. In essence, they need to create a search engine that generates more demand for their product than Google can, otherwise why would a user switch over? Considering Google’s track record this poses a daunting task.
Although Google’s revenue stream lacks diversification it has taken some big steps toward increasing those revenues. YouTube has provided a platform for video advertising and with YouTube’s consistent popularity as well as the increase in advertisement with a growing economy, both video and search reap the benefits. On a different note, Android has panned out as a huge success. Reports have stated that Android users stay connected longer and use search services more than any other phone users out there. With Google’s ability to create value in these areas the outlook for future growth is promising.
Overseas brings about concern for Google in multiple areas. To begin with, fluctuating markets in Europe provide instability to a region that makes up 1/5 of its revenue. Although it has emphasized hedging its currency risk, there is only so much it can do with a troubled economy. Farther East China provides a problem with its barriers to entry and the expansion of Baidu (BIDU). Baidu is no joke and with its strong growth outlook and roughly $45 billion Market Cap, it will not go down without a fight. China’s government is tough to reason with as well, so it does not seem like Google will command such a presence in China as it has in other parts of the world anytime soon.
From a valuation stand point Google trades at around a P/E of 21, about in line with the industry, and a PEG of 1.14 gives it some value. It assumes a forecasted 30% growth outlook and it is not unreasonable to believe Google could jump $100 in over a year’s time. Google trading at around industry averages when it is clearly a superior company gives hope of an increased share price.
Technically Google shows rising momentum and volumes and the moving averages indicate continued up trending.
The concern is that if Google sputters at all in the earnings, investors could perceive overvalue and sell off; however, this is not justified because Google is looking to the future. Evidence for this is written on every move it makes and for this reason Google stands as a buy and win for the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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