On Google: Why the World’s Leading Internet Company Remains a Buy Despite its Run-up

Google (GOOGL) has been one of the most discussed, debated, and controversial technology stocks since going public in 2004. Once a mere search engine alternative to AltaVista, this company has evolved tremendously under the helm of Larry Paige and Sergey Brin. Today Google is the world’s preeminent internet company, and it is seemingly impossible to imagine the world without its incredible products. The market certainly understands Google’s dominance, awarding it a market capitalization of roughly 400 billion dollars as of this writing. Only a handful of companies in history can boast such an accomplishment. So are Google’s best days as a stock behind it? We don’t think so. As the world continues to become increasingly reliant on internet technologies, we think Google will be one of the prime beneficiaries of this long-term trend, delivering ample gains for shareholders. 

While many investors may be skeptical of the idea that a 400 billion dollar juggernaut can continue to outperform the market, we would remind investors to consider the many factors that are working in Google’s favor. For starters, this company is lead by Larry Paige, Sergey Brin, and Eric Schmidt. This trio has a remarkable track record of execution and has managed Google for the long term. They have seamlessly managed the transition from desktop to mobile advertising despite what critics say. Critics have pointed to declining cost-per-click (CPC) metrics and have lamented that mobile advertising is less valuable than desktop advertising. We wound remind them of comments made by Nikesh Arora, when he was chief business officer at Google, that suggested “in the medium to long term, mobile pricing has to be better than desktop pricing. And I think the reason- the way to think about it is that in mobile you have location and you have context of individuals which you don’t have on the desktop. And the more you known about the user and their context, the more effective advertising you can provide to them.” We have no reason to doubt Google’s claims. Their executional track record is nearly flawless, and they are one of just a few companies that have delivered double-digit EPS growth over the past decade every single quarter without exception. We would also add that mobile is a much larger platform than desktop. Cellular phones, especially those on the Android operating platform, are much cheaper than laptops or desktops. Already, Android has more than 1 billion active users, and it shows no signs of slowing down. We believe Google will earn materially more from advertising in the future than it does today as its mobile ads become more expensive and its Android user base continues to grow larger. This year analysts expect Google to report annual revenues of 67 billion. Assuming the company can continue to grow its revenues 15% for the next 5 years (a conservative estimate), Google would more than double its revenues over the next 5 years to more than 130 billion. For a company that operates such a sustainable business model, we think the shares are still a steal today. 

With such positive long term catalysts, one might suggest that all future growth is already priced into the stock. We don’t believe this is the case. 

Company	Market Capitalization (Billions)	PE Ratio (TTM)	PE Ratio (2015 EPS)	Expected Revenue Growth
Google	398	30.9	18.6	18.3%
Facebook	202	82.6	37.7	34.4%
Twitter	32	N/A	137.4	66.9%
Apple	609	16.3	14.12	10.5%

Source: Yahoo and Google Finance. Data from September 16, 2014. 

As compared to other names in the internet space, Google remains a tremendous bargain. Google is still growing very robustly for a company of its size, and when priced by its forward earnings expectations, appears to be a steal. While Facebook has higher expected rates of earnings and revenue growth, investors are paying nearly 40 times 2015 earnings for the stock! Although we have tremendous respect for Mark Zuckerberg and his company, we believe that Google currently offers investors a better value for their money. Apple, while not a true internet company, is included for comparison. Clearly the most mature of the businesses, Apple offers the least amount of growth. However, given the margin of safety investors have with its low valuation and its impressive product pipeline, we believe investors should also own Apple (the subject of another article). 

We clearly believe very strongly in Google’s future. The incredible projects the company are undertaking at Google X are nothing short of incredible. Robotics, driverless cars, and Calico are just three of their many potential future sources of revenue. With the exception of Apple, no other technology company currently has the financial firepower and innovative leadership to fund and oversee such groundbreaking products. While many of these projects may pan out to be unprofitable, we know that some of these bets will pay off. The combination of this company’s immense cash hoard, diversification of revenue into so many areas (Search, YouTube, Android/Google Play, and forward looking initiatives leave us feeling very confident that Google will be a stock that investor’s can comfortably hold for the long term.