Tuesday, March 22, 2011

Update of Portfolio: Google (GOOG)

Next up on my portfolio update is Google (Ticker: GOOG).  Click on the link in the previous sentence to see all of my posts on the company.  I've written not little about this company.  Reading the older posts will give you a flavour of my thoughts.

Where to begin?  How about an amazing 2010 for Google?  If you look at the Rule #1 spreadsheet below, and click on "Big 5" and scroll down to "EPS", you will see the historical earnings for the past 10 years.  The growth is phenomenal!  Aside from year when the world was coming to an end (2008 if you weren't paying attention), the minimum year-over-year EPS growth was 28.9%, which was last year.  Yes, the growth of the company is slowing, but at 28.9%, it's still pretty red hot!



Figure 1: Rule #1 Analysis of Google (GOOG)


Red Hot Growth
Is the growth going to continue?  My answer is: YES!  There are several factors that we can look at.  First, and foremost, the internet has not stopped growing.  How do I know?  Well, let's take a look at a somewhat related technology, the cell phone.  It's been around for about 20-25 years now (at least commercially) and you would think that the technology has pretty much plateaued.  Are you kidding?  Just look at the new smartphones that are coming out every week, and you know there is still tremendous growth.  Now, going back to the internet...it's just about the most revolutionizing technology of the 20th and 21st century.  It has changed the way humans do things.  Just think about it: when was the last time you wrote a letter?  When was the last time you opened a phone book to find a phone number?  When was the last time you looked for a job in a newspaper?  And the list goes on.  Is the internet mature now, after being widely available for about 15-20 years?  I hardly think so.  Facebook, the newest internet darling is barely 7 years old!  Who knows what's going to happen in the next 20 years.  But you can bet Google will be part of it.

Second, Google is still supreme in the internet space.  One piece of anedoctal data: Google makes up about 94% of the search engine traffic to this site.  Facebook, while exhibiting tremendous growth, made about $2 billion in revenue last year, while Google made about $8.5 billion in net income, and about $29.3 billion in revenue.  Facebook still has a ways to go to catch up from a business standpoint.  Many speculate that Facebook will dethrone Google, but the two companies don't really even directly compete against each other (save Google's Orkut).  In fact, I believe they complement each other pretty well.

Third, Google has good products and services.  Unlike Microsoft (Ticker: MSFT) but like Apple (Ticker: AAPL), people enjoy using Google's offerings.  Gmail is quick, Google Maps is indispensable, Android is a very compelling alternative to the iPhone, Youtube is synonymous with online videos, and last, but definitely not the very least, the Google search engine is still the very best.

Lastly, Google has vision.  The co-founders Sergei Brin and Larry Page are two of the brightest computer scientists around.  They have the technical know-how to steer the company in the right direction.  The foresaw the emergence of mobile internet a few years ago, bought a small company called Android, and developed it into the smartphone platform that now has the greatest market share in the US.  It could very well have developed a "gPhone", but instead, it made a platform that was free to phone manufacturers.  Consumers like choice.  Some people, like myself, just don't want to own something that everyone already has.  I like to be relatively unique, but don't want to sacrifice on performance either.  Android fills that gap nicely.

Cloud computing is undoubtedly the next progression in computer technology.  Google understands that and is already committed with their Google Docs and upcoming Chrome OS.  If you have not used Google Docs before, it's a cloud-based replacement for Microsoft Office.  Granted, it's nowhere near what MS-Office could do, but for everyday, simple tasks, it fills its shoes quite nicely.  Lately, my wife and I have been contemplating moving to a larger house and we use Google Docs to collaborate and save listings that appeal to us, whether we're looking at the listings from our computers at home, or browsing during our lunch hours (I swear, I never surf the web during work hours!! [just in case my boss reads this] LOL!).

Some Numbers
Looking at the Rule #1 spreadsheet above, the fundamentals look good.  The only thing is that Google is approaching its intrinsic value or sticker price of $673.  However, it has seen a slow, but sure drop to the $550 250-day EMA support lately.  Couple this with a forward P/E of around 14, I thought this was the biggest discount the stock was going to see.  So, I did what felt right: I added to my position.  We'll see what happens next.

My current average cost is $494.  So, I'm making a bit of money.  Analysts have Google making around $34.59 in 2011.  If the P/E ratio is maintained at around 20, the stock price could go up to $700 by the end of the year.

Some Caveats
There are some caveats for sure.  They include i) China and ii) ethics.

As we all know, the Great Firewall of China is even more formidable than the physical wall itself.  China is very paranoid about free speech and the free flow of information.  It requires that search engines present censored search results.  If you don't believe it, go to www.baidu.com and search for "tiananmen square massacre".  I got a total of 8 results...8!!!  Google.com gave me 477,000 results!  Just early last year, Google decided it wasn't going to censor its results anymore.  The Chinese government quickly blocked the site.  Google now runs google.com.hk as its Chinese version of the search engine, because the Hong Kong Special Administrative Area has different laws than the mainland.  However, the government can still block that site from its mainland users at any time.  When everyone is trying to get into China, Google has opted for higher moral ground and has gotten out.  This may not be an permanent situation, but for now, it definitely has not helped its business in China.  Investors have punished Google for this move in 2010.

Google also has some fairly left-wing leanings.  It fully supports the homosexual movement and advocates for them.  I've discussed this issue before.  So, please check it out.  In any case, this is one thing that holds me back from 100% endorsing in the company.  I have weighed the pros and cons in my reflections and have determined that this does not warrant me to pull my investment from Google, but I do keep an eye on any new developments and may change my position to reflect them.  If you do decide to invest in Google, I advise that you do the same.

Conclusion
From the business side of things, there really are no concerns.  Google is in a good position to capitalize on the continued growth of the internet.  It is fully aware of its competition and I'm sure they've got some bright brains behind the curtains working on something.  Unless the business fundamentals show significant deterioration, or the ethical side of things take a really horrible term, my money is still with this company.