Google is getting cheaper; valuation attractive after consistent growth and stock pullback
Google continues to roll. The share price will zig and zag but the company is making strides by investing for growth and positioning for better results in the future. Current results are still quite respectable today and earnings and cash flow growth are catching up to the stock price. The GOOG investment theme has been a good one since 2011 (this stock has been a CJF favorite) and multi-month periods of stock price pauses are generally good times to consider an entry point for enduring growth stocks. Some general dynamics for GOOG investment have been in place for several quarters:
- Very strong sales growth, generally north of 20% adjusted for one-time items and currency.
- Dramatic market share gain within advertising markets as spend shifts from traditional media to digital media.
- A tectonic shift in the importance of mobile advertising creates controversy around the sustainability of Google’s business model. But fears on the matter are overblown, GOOG has invested in mobile for a decade, and is well positioned to dominate within this market.
- The earnings algorithm is working; earnings and cash flow growth are well above the market, supporting a relatively high valuation.
Within this big picture backdrop, GOOG went into its 1Q14 results after a material swoon from the highs ($1,100 from highs of about $1,220 or post split, $550 vs. $610) with some hopes for a beat after a big draw-down in the NASDAQ, and growth stocks in general.
The quarter GOOG put up could be classified as approximately in-line. Not an investment thesis changing quarter. Adjusted earnings of $6.27 vs. consensus of $6.44 essentially met expectations.
- Sales remain strong, growing 21% (ex-ccy) driven by volumes, end-market growth, and market share gain, but inclusive of an aggregate cost-per-click decline of 9%.
- Expenses were higher than expected within discrete legal expenses impacting G&A and M&A related expenses impacting R&D. The outsized R&D relates to the Nest deal; obviously a big investment with the potential for future payoff.
GOOG stock pulled back in the after-hours (by 4-5%), although the decline was tempered when one-time expenses were detailed on the call. Moreover, GOOG shares did rally almost 3% into the print on Wednesday. GOOG’s after-market price of about $540 represents 16.8x Street estimates of $32 in EPS for 2015. These estimates won’t fall much in upcoming days because the Street will model a lower expense ratio in upcoming quarters. Patrick Pichette (GOOG’s CFO) made it abundantly clear that 1Q14 expenses were abnormally high this quarter due to legal expenses and the Nest deal, and would have otherwise achieved plan (though the plan was not quantified). This will be enough to hold Street estimates. GOOG’s out-year multiple is creeping towards the lower-end of a reasonable range, and for the first time in close to a year, the valuation of the stock supports building positions or entering the investment theme for the first time. From current prices, dips can be bought aggressively based on valuation support; an opportunity the market doesn’t often provide when investing in preeminent growth stocks like GOOG.
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