From my perspective Google (GOOG) has become a very difficult company to analyze as an investment. The company has so much money and resources now that it really just seems like they are getting their hands into everything. As their core advertising products (Adwords and Adsense) begin to mature the big question is, where will the next leg of growth come from? Google surely has the people and the cash to reinvent or create new products that actually make the company money, but most of their time nowadays seems dedicated to releasing products that don’t make a dime. The Chrome web browser, Android operating system, and the recent unveiling of Google TV are just a few examples.
Along with the rest of the stock market, Google’s stock has taken a hit and now trades for around $470 per share, down about 25% from its high of 52-week high of $630. For all of the “growth at a reasonable price” (GARP for short) investors out there, the stock probably looks enticing. Based on 2010 estimates of $28 per share in earnings, GOOG trades at less than a 17 P/E. The EV/EBITDA multiple on trailing results is 12, which is very reasonable for a growth company.
The question in my mind is “Are they just going to keep spending money and resources on innovative products that don’t add to the bottom line?” Google TV, for instance, looks very cool but how is the company going to make money by giving out free search software for televisions that allows consumers to find their favorite programs across multiple platforms (cable, web, streaming, etc)? As soon as online advertising market share (as a percentage of total advertising spending) starts to level off, where is Google’s growth going to come from? And if this question is really as up in the air as I think it may be, is the stock really even that attractive at 17 times earnings?
I really enjoy buying and selling on eBay, but the company’s auction site has matured and now growth is in the single digits. Today investors can buy eBay stock for less than 13 times earnings. eBay hasn’t really found another way to boost growth, and as a result the once high-flying stock now trades at a discount to the S&P 500 despite being a dominant player in an attractive and very profitable market segment.
It is for this reason that I find it very difficult to evaluate the investment merits of Google stock today. On one hand the stock is quite inexpensive relative to what Google has accomplished up until this point. On the other hand, if growth continues to slow in the company’s core advertising markets and they simply spend excess cash flow producing innovative products that are given away for free, I am not sure that earnings will grow fast enough to net investors sizable returns going forward. And if the P/E continues to contract, as it has for companies like eBay, creating shareholder value becomes even more difficult. While the downside looks limited given how cheap Google stock is today, I have mixed feelings as to whether it warrants the commitment of new capital.
As always, your thoughts are welcomed and appreciated.
Full Disclosure: Peridot Capital had a very small long position in Google and no position in eBay at the time of writing, but positions may change at any time