The Good, The Bad, and the Google

Google (GOOG) posted a profit of $7.64 last night, up 30% from $5.89 a year ago and $0.96 better than July 22 estimates. Revenue rose 25%. Here’s the Good the Bad and my take on GOOG stock:

The Good

30% profit growth puts Google back on track in the eyes of growth stock money managers. Before the Good news, Google was expected to grow profits 13%, 11%, 11% and 15% over the next four quarters. So the 30% beat the 13% and I’m guessing the rest of the estimates will jump too.

2010 Fair Value on GOOG

GOOG closed at $541 yesterday and is looking to open around $597. Let’s say GOOG is a $600 stock. Estimates for 2010 (this year) are $27.33 now and will probably jump to around $30. At $600, that puts GOOG’s P/E around 20. I think a 25 P/E could be had this year and 25 x $30 = $750 fair value on the stock, 25% realistic upside this year.

2011 Fair Value on GOOG

Estimates for next year (2011) were $31.45 before the beat down by almost a buck last quarter. So let’s just guestimate now that the Good is out, Google might make $35 or so next year. Google has grown profits 33%, 31%, 20% and 31% during the last four quarters. I think a P/E of 25 is realistic but we are in a market that is catering to tech stocks, so 30 times earnings can happen. A 25 P/E gets us 25 x $35 =$875 fair value for 2011 and 46% upside to fair value by 2010. A  30 P/E gets a 30 x $35 = $1050 fair value for 2011 and 75% upside to fair value by next year.

The Bad

Google missed estimates last quarter. I hate that. It caused me to sell GOOG stock from my Growth Portfolio for the second time. I used to be a big Google backer, having originally purchased the stock for clients at $188 on October 27, 2004. I’m a buy-and-hold guy and wish I had the stock today — but yesterday I was glad I didn’t.

Here’s What’s Important to Money Managers

I hate uncertainty, and as a money manager I don’t wish to put my client’s money at risk. That’s Bad. If they sleep at night I can focus on work during the day. The three things that are important to stock portfolio managers are (1) don’t lose your clients money (2) don’t do anything to put your personal livelihood at risk, as in doing something that would jeopardize my ability to feed my family or harm my career (3) provide a good return that’s hopefully higher than the S&P 500.

I also don’t feel like getting bounced around like some two-bit girlfriend. You know, the kind you’re nice to for a while, then diss, then call again and act all nice. That’s what Google has done to money managers — its been Bad and dissed them before. Also, since Google management doesn’t give forward-looking estimates, we could get dissed again — like when you tell the girl you’ll see her again, but nothing too serious.

The Hottness Could Wear Off

Google management said “newer businesses are seeing great momentum, I really mean it” but aren’t all companies seeing great momentum now that the recession has passed? Google is an ADVERTISING company and its doing well in a rebounding economy. The economy has bounced back.

That’s why the 30 P/E might be too much. GOOG has a market cap of $172397 million. Yes, I left the number thatway to prove a point — you’re going to have to get a lot of money behind this stock to make it move and after the way we’ve (money managers) been treated Bad before I don’t know how much I can trust this stock.

This is a big company that’s more mature than it was a few years ago when it was popping off 40-60% profit growth. Long-term its probably a 20% grower, so that 30% profit growth from last quarter could be a tease.

The Google

What to do with this stock, I just don’t know. I hate buying and selling and buying and selling. I’m still bitter about GOOG missing two quarters ago when the economy was Good. It looks as though this $600 stock could go to $875 – $1050 within a year, upside of 46-75%.  The numbers look great, I just don’t want to get dissed again.