Google is a Buy if You Can See Beyond the Storm
Ken is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In his recent Motley Fool article discussing “When Earnings Estimates Are Useless,” Jeremy Bowman's main takeaway is that a number of unknown factors can intervene to disrupt our models. If Jeremy is correct that models are vulnerable, investors should learn to become comfortable relying on qualitative analysis. I agree with Jeremy -- getting too mired in number crunching can leave an investor missing out on the forest for the proverbial trees. Long-term investors should study market trends and leadership qualities alongside their bedside copy of Benjamin Graham’s The Intelligent Investor.
Even though quantitative analysis isn’t a perfect science, it can be used to find starting points for determining where the market’s short-term thinking can be exploited by Foolish investors who are content to watch their thesis play out over years and decades. I like to find moments where price-to-earnings ratios are temporarily compressed on the world’s greatest companies because of momentary bad news. In my experience, digging into the (ill)logic behind Mr. Market’s frequent hysterics can produce market thumping returns.
Growth at a Reasonable Price
One opportunity offering itself up for patient investors is Google (NASDAQ: GOOG). The stock is trading with a trailing twelve months p/e ratio below 18. Yahoo Finance reports that the average of analyst eps estimates for FY 2013 is $50.29. From the ttm eps of $32.99, the pros are expecting better than 50% eps growth over the next seven quarters. High-quality growth along with a cash-flush balance sheet and nearly no debt makes Google look like a no-brainer investment at today’s bargain price.
Of course, these estimations for Google's earnings could be wildly inaccurate. There are threats lurking behind every headline.
- Europe looks like it is entering a wicked double dip recession. Google gets over 50% of its revenues from overseas and will definitely get whacked by a spreading European contagion.
- Users could determine that Google is evil for overstepping the privacy line, as this Wired article argues.
- Facebook (NASDAQ: FB) could break free from its IPO funk and take search by storm.
- Microsoft’s (NASDAQ: MSFT) foray into tablets and smartphones could shock the world and upset Google’s strong market position.
- Already putting nervous investors into fits is Apple’s (NASDAQ: AAPL) recent announcement that that it is developing its own mapping software to move advertising revenue away from Google Maps.
The bad news is that these are the problems we can see coming. The real stomach churners are those that we don’t see yet!
The beautiful thing about threats to a company’s near-term profits is that they create opportunities for investors who can see beyond the storm. Even if Europe releases a grizzly bear that tears the face off of this market, Android will still likely be the leading smartphone operating system after the storm. If I was an owner of Research in Motion’s (NASDAQ: BBRY) dwindling market share, I might hit the panic button, but Google is the king of the smartphone heap. Threats of recession might slow advertising spending more than expected in the near term, but in the long run, Google will be well placed to capture mobile profits when ad spends return. Add in the fantastic Chrome operating system with a twist of YouTube and Google is a market beating business.
Even better, Google increased its hiring and R&D over the past year. This company is focused on building for the long term. I am patient to wait for the growing profits that are likely to follow.
The Art of Investing
Investing is much more of an art than a numerical science. If investing was all about math, the market would be perfectly efficient. Lucky for us, crystal balls are always foggy and short-term thinking can cause oversold situations. When the market starts to offer up bargains, investors should look at the story behind the balance sheet. If the numbers look good and the story makes sense, ignore the crowd and pick up shares for long-term outperformance. I believe Google’s story will outlast these temporary woes and will outperform the market. I personally own shares and made my call public over at Motley Fool’s CAPS. Be sure to make your opinion known and rate Google too.
BoiseKen owns shares of Apple, Google, and Microsoft. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.