Google (GOOG) has gone from $600 to $800 in the last year. The main reason is the P/E has jumped from 14 to 18 during the same time. I’m surprised the stock’s done so well, profit growth has averaged 9% during the last four quarters.
Google’s problem is profit margins continue to erode. EBIT margin fell 7% to 25% last quarter. Geeze. Sales are blossoming because of the Mororola Mobility purchase but this division is hampering profits. Another thing hurting margins is people are using their cell phones for search more often now, and this isn’t as profitable as desktop search.
What saved the quarter was GOOG’s tax rate was only 8%, because of an R&D tax credit. This tax rate is bound to rise. The question is can Google management get some of these initiatives they have invested money & labor in to pay off?
One Year Chart
Google beat the street by almost a dollar last quarter, but estimates for the next three quarters just came down. Revenue rose 31% but profits increased only 15%. Profits should have grown faster. The P/E of 18 is not only high, but the top I think GOOG should sell for.
The big if for GOOG is if the company can increase profit margins (or stop pissing away money, or find something that can be a billion dollar business) then profit growth could maybe go back over 20% and the stock could continue higher. Online ad revenue grew 22% last quarter, profits should have increased at least 25%.
Fair Value
I’m keeing my Fair Value P/E at 15. I think big value stocks have made their run so far this year and need a break. This could be a good stock to sell in May and go away (until late in the year).
Sharek’s Take
That 8% tax rate won’t last. A high tax rate could crimp profit growth later in the year. This company should be doing much better considering revenue growth is above 20%. If management ever gets its act together profit growth could zoom past 20% — if that happens I’d buy the stock. For now, I think GOOG is fairly valued.
View the Earnings Table here.View the Ten Year Chart here.
