The Business With a "Moat Filled With Sharks"

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have been watching Google (NASDAQ: GOOG) since the beginning of 2010. At that time I was jealous of investors who bought Google’s stock either at the end of 2004 or at the beginning of 2009. Google seems to be a growth stock, as it keeps growing its profits and cash flow at a high rate. However, its stock price has experienced fluctuations, with the beta of 1.17. That means Google’s stock is more volatile than the overall stock market. 

Price fluctuations

Since 2009, there been several corrections in Google’s price, when it fell from $618 to $436 (Dec 2009 – July 2010), from $629 to $474.8 (Feb 2011 – June 2011), from $603 to $490 (June 2011 – Aug 2011), from $643 to $564 (Mar 2012 – June 2012). Since 2012, it has climbed continuously to a new high, $774.3, in October 2010. However, in the last 5 years, its share price advance is nothing compared to Apple (NASDAQ: AAPL) and Baidu.com (NASDAQ: BIDU).

<img src="/media/images/user_14219/screen-shot-2012-10-19-at-101454-am_large.png" />

Third quarter results come early

Google’s Q3 2012 earnings announcement came early. It had revenue of $14.1 billion, 45% higher than the same period last year. The higher revenue was contributed by $2.58 billion from its Motorola business, and higher revenue from Google (advertising and other). Although Google had good top line growth, net income for the third quarter was $2.18 billion, much lower than $2.73 billion in the third quarter 2011. It was due to higher expenses in R&D, SG&A and $2.1 billion costs of revenues from Motorola business, which didn’t exist in the 2011 third quarter. Its EPS for the quarter was $6.53, 23.4% lower than its EPS in the same period last year. Google missed Wall Street estimates badly. Analysts expected that Google’s EPS would be around $10.65 a share, but the non-GAAP EPS came at only $9.03. This quarter can be considered worse than the other two previous quarters, when Google beat analysts’ estimates.

Valuation

As of September 2012, Google had $16.3 billion cash, $29.5 billion marketable securities, only $6.2 billion debts, and $68 billion stockholders’ equity. Trailing twelve months, its EPS is $31.92 per share. With the current price of $695 per share, the market is valuing Google at 21.8x P/E and 3.34x P/B. Google seems to be expensive when investors scan through its valuation, but it has been expensive most of the time. Actually it is cheaper than its 5-year average historical valuation of 30x P/E and 5.2x P/B. Compared to its other tech peers such as Apple and Baidu, Google seems to be reasonably priced.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Google </strong></p> </td> <td> <p><strong>Apple</strong></p> </td> <td> <p><strong>Baidu</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>21.8</p> </td> <td> <p>14.8</p> </td> <td> <p>28.8</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>3.34</p> </td> <td> <p>5.3</p> </td> <td> <p>11.7</p> </td> </tr> <tr> <td> <p><strong>PEG</strong></p> </td> <td> <p>1.2</p> </td> <td> <p>0.63</p> </td> <td> <p>0.63</p> </td> </tr> </tbody> </table>

Among the three, Apple seems to be the cheapest, with its P/E of 14.8x and PEG of 0.63x. In terms of the PEG ratio, Google seems to be the most expensive as its PEG is nearly double than Apple’s and Baidu’s. Nevertheless, it is the growth expectation. Baidu maintains its great growth and expensive valuation because it serves the biggest market in the world, China, where Google couldn’t get in. And Apple seems to be cheap, but it will need to rely on its innovation for new products to drive its growth in the future. For Google, even Charlie Munger has mentioned about its moats several years ago: “Google has a huge new moat. In fact I’ve probably never seen such a wide moat. I don’t know how to take it away from them. Their moat is filled with sharks.” 

My Foolish take

Where do we go when we want to find information and we want it right away? Of course, it is Google. But in China it is Baidu. Currently, we can live in this world without using an iPhone, Mac, and iPad as there are other alternative options around. But I can’t imagine a day without Google. Personally, I think Google is still one of the best companies for investors in the long run. The short-term fluctuations in its stock price would create buying opportunities to invest in the best global search engine.  

Dig Deeper

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hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Baidu, and Google. Motley Fool newsletter services recommend Apple, Baidu, and Google. 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.

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