This week Google Inc. won first prize in Harris Interactive’s annual poll of corporate reputations. But the company, facing Federal Trade Commission antitrust and privacy probes, did not win on trust, admiration or respect, but rather for its impressive balance sheet and on-site massages.
At $535.82, Google’s shares have tumbled 17 percent year-to-date (while the S&P 500 gained 6 percent over the same period). Still, now’s not the time for long-term investors to be squeamish.
Google’s seemingly indestructible brand reinforces its value long-term. The company reported 27 percent year-over-year revenue growth in the first quarter, and Rick Summer, analyst with Morningstar Inc., believes its growth story will be tied to the upward trend in online advertising.
“We expect that Google will leverage its dominant position in Internet search and support strong growth in display and mobile advertising, allowing it to meet or exceed overall industry growth rates,” he said in a note.
The numbers
Investors seem to agree. Compared with S&P 500 averages, Google’s price/sales ratio and price/book ratio are notably elevated. These numbers indicate that the market is pricing in steady future growth.
| S&P 500 Average | ||
| P/E (TTM) | 19.64 | 17.59 |
| P/S (TTM) | 5.50 | 1.07 |
| P/B(TTM) | 3.50 | 2.20 |
Bank of America Merrill Lynch analyst Justin Post maintains a buy rating on Google stock with a price objective of $750. He predicts doubt-digit earnings growth over the next three years, with large potential upsides on mobile and display advertising. Paid click growth on Google ads grew 18 percent year-over-year in the first-quarter and Post calls Google “one of the most reliable growth companies in the Internet sector.”
Looking at Google’s five-year expected PEG ratio of .95 clarifies its current position as a strong value play. With shares priced in the triple digits, how can Google be a value play, you ask? Read on.
Operating expenses
If there’s an area of concern on Google’s financials, it’s rising operating expenses. In the first quarter, expenses rose 35 percent to $5.8 billion from $4.3 billion a year ago, primarily due to hiring and a company-wide salary raise of 10 percent in an effort to retain employees.
But Bank of America Merrill Lynch’s Post writes that concerns related to increased operating expenses are “overly discounted” in the stock.
Plus, with nearly $37 billion in cash and marketable securities on its balance sheet and virtually no long-term debt, Google is primarily financing its growth with equity. Who can begrudge a little added expense for those on-site massages?
| Industry Average | ||
| Total debt/total equity | 6.52 | 50.39 |
The conclusion
Though the search giant faces increased competition in online advertising from social media companies, it has performed well at its core business and has steadily built its pervasive, now award-winning brand. As it continues to monetize YouTube and its other online products as well as dive deeply into the mobile and tablet sector, the company is positioned to deliver to shareholders.
FTC? Rising costs? Who cares as long as the company continues to grow and I get my Google Doodles!