Monday, October 13, 2008

Marcial: Making Eyes at Google

Marcial: Making Eyes at Google

Never say never, especially in this kind of a brutal market environment. Who would have expected that Google (GOOG), the world's largest and most powerful Internet company, would ever see its stock tumble to (gasp) 328 a share. Yes, 328. And in this kind of fickle, volatile market, the stock may even skid some more.

Who would have expected that Google will be selling at what some people say are fire-sale prices? In April, Google traded at 555.

Remember that Google traded as high as 747.24 on Nov. 7, 2007. Few thought it would give back a significant chunk of its astonishing gains since it became a public company in August 2004. Well, on Oct. 9, 2008, it did, mirroring the jaw-dropping sell-off in the broader market.

So what should investors do now with the stock of the Internet King?

Investors have been yearning to buy into Google at prices lower than 500. At its current price, Google is trading at a depressed (for Google, anyway) price-earnings ratio of 14.9, based on Zacks Investment Research's estimated 2009 earnings of $21.03 per share, down from its p-e ratio of 34.6 at the end of 2007. So the undervalued and over-disparaged condition of Google seems obvious.

"highly compelling"

One analyst who sees the attraction of Google at its current price is Mark May, an analyst at investment firm Needham & Co. (it has done banking for Google), who issued a buy rating on Oct. 1, when the fast-moving stock was trading at 405.

"We believe the current valuation at 15 times [based on his 2009 earnings forecast of $22.74 a share] is highly compelling," wrote May in a note to clients. For 2008, his earnings estimate is $19.63 a share, up from 2007's $15.58. He is maintaining his buy recommendation, with a 12-month price target of 690 a share. May says any risk of possible disappointments in Google's third-quarter revenues are already largely anticipated and reflected in the stock's current price.

"Google remains the dominant market-share company in both the U.S. and globally," says May. Current traffic data indicates that search volumes at Google "continue to be solid," he adds. Google provides Web search and online advertising services on the Internet.

The weakened economy is undoubtedly having an impact on Google's results, and a stronger dollar could impact its revenues, says May. Some analysts have revised downward their estimates to adjust to the dollar's recent strengthening. But May argues that continued gains in Google's search business and the resilience of the company's performance-based marketing channels are helping offset those concerns. And Google has one of the best platforms, he points out, for expansion into new high-growth consumer and advertising service markets.

a bet on broader services

Jason Avilio, an analyst at investment firm Kaufman Bros., says he still likes the stock because Google continues to take market share in search advertising from just about everyone else. "Despite its competitors' best efforts, Google's market share continues to grow, and we don't expect this to stop anytime soon," says Avilio, who rates the stock a buy.

No doubt the global economic uncertainty and competitive pressures could slow the company's revenue growth. But Scott Kessler, an analyst at Standard & Poor's, isn't too worried, and rates the stock a buy also. Google's business model, he argues, has demonstrated "notable resiliency," and he favors the company's efforts to broaden its services, especially in Web applications and mobile services.

Independent research outfit ValuEngine rates Google outperform, based on data and information it has gathered, and puts its value at 618.37 a share.

Without a doubt, the selling in Google shares appears to be overdone. Street analysts think so. Of the 34 who follow Google, all except one recommends buying the stock as of Oct. 8, according to Bloomberg. The one dissident rates Google a hold.

At Google's currently depressed price, investors need not search far and wide for a truly beaten-down stock that is as underpriced as this Internet behemoth.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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