Google reported earnings on October 13th, and for the second straight quarter, the results were good and above expectations. Profit growth was 27%, revenue growth 37&. Both those numbers “fit the mold”.
One-Year Chart
In the one-year chart (right) you can see the stock popped on the news. GOOG fell to the $480-$500 level for two days in October during terrible market conditions. The stock then climbed to $560 before reporting and then opening the next day at $600.
What makes this stock better than last quarter is the P/E just got reduced from 18 to 13. The main reason is I’m now looking ahead to next year’s estimates when calculating a P/E. So instead of using $37 in or so in profits I’m using $44. Its November — I’m looking ahead to next year.
At thirteen times earnings, GOOG is a steal. Profit growth is estimated in the high-teens for the next two quarters. From looking at prior quarters, mid-20s growth could be coming as GOOG has beaten the street three of the last four quarters.
Ten-Year Chart
Additionally, the ten-year chart shows the stock has built a long cup-and-handle dating back to April 2008. That’s three-and-a-half years. The longer the base the more solid a stock becomes.
The break out point is around $650. A move past that could yield another run higher like we saw 2004-2006.
The negative is the Google doesn’t care what you think. The stock doesn’t pay a dividend and the company has not treated shareholders well. The company doesn’t even provide guidance. Thus GOOG is getting punished by Wall Street — that’s one reason the P/E is so low.
I got burned by GOOG in recent years — buying high and selling low — although I was in for much of the earlier part of the decade. Google was at one time my largest holding, and it served me well for many years.
Fair Value
I think GOOG is worth 18 times earnings. That’s the P/E it got last quarter. With that in mind, upside here is solid as you can see on the right.
Bottom Line
The company is large and growing rapidly. Its my duty to clients to try to get them the best growth stocks on the market, and Google is one of them (even though I have a bad taste in my mouth about the company). Unfortunately, I think I will have to purchase Google.
I have Google around the top of my radar. Either a fall to the low-$500s or a breakout at $650 will likely push me to buy the stock once more.
Disclosure: Although GOOG is not in Sharek’s Growth Portfolio, clients of DavidSharek.com owned shares of GOOG at the time of publication.
