GOOG - To Buy Or Not To Buy?

I don't own Google stock. I never have. That has been a mistake.

And so now I ask myself, should I correct that mistake?

I have sat on the sidelines and watched Google put up amazing quarter after amazing quarter.

It is clear that Google is executing well on its core business, search and text advertising.

And it is also clear that they build great products that users love.

And they are now showing with the acquisition of YouTube that they are willing to step up and buy more than developers.

People say that Google is expensive. The lack of stock splits and the $460/share price is part of that. So is the market cap at $140bn. But if you annualize the third quarter earnings, Google is earning net after tax income at the rate of $3bn per year. So the stock is trading at about 50x net income.

That's a nice multiple, but I remember when tech stocks like Microsoft and Oracle traded at closer to 100x earnings and still went up.

Google's net income doubled year over year. If you think it can double again, then 50x earnings is cheap.

I don't think it can double year over year again, but I've been wrong about this stock from the day it went public.

I am thinking about buying some tomorrow. Just to own it. Schmuck insurance. I was like the guy in this Wallstrip video who said he doesn't own Google, but he owns Yahoo! I think it's time to try the other shoe on to see how it fits.

UPDATE: HipMojo says that Google could pass Microsoft's valuation (that being $284bn) by 2010. His logic is simple. If Microsoft cannot grow anymore and Google grows its top line at the rates analysts are predicting, and if their operating margins stay at 25%, and if the PE drops to mid 30s, it will happen. A lot of ifs there, but it's worth reading. Could be a peak into a crystal ball.

Comments

[howard lindzon]

Shmuck insurance is hilarious but not financially sound. Wait until it takes out an all time high (just another 5 or so percent).

[howard Lindzon]

I think schmuck insurance is such a great idea if the right strategy is applied. Meerrill Liynch should have a fund that buys stocks closing at all-time highs and call it the schmuck fund. it would do better than their Mensa and think tank fund.

Of course it would die from lack of support as their buy low don't be a schmuck fund is perfect for everyone.

[Ben]

GOOG is executing unbelievably well on its core business. Agree with that statement. "Building great products that users love..."

Which ones are those?

[Hari]

I agree with Ben, Gmail sucks, Blogger is outdated, Orkut is no more popular in U.S. youtube is a good buy, but is it really worth the money, no one has answered straight on that, I feel most of the community sites are like trends, Is there a risk of users moving to newer viedo sites in future, can Youtube have the same fate as Otkut ?. Too early to say anything now i guess. But can anyone answer this for me.

[mark pincus]

guys, i hate to be the lone quasi-contrarian but...

fred, you're at risk of chasing returns, selling yahoo when it goes down and buying goog when it goes up. i own google and am not selling here. i own yhoo and am not buying here. both seem to be good holds given the macro outlook. one is kicking ass and valued for it. the other having problems and also valued for it.

[Ragu Sivanmalai]

While reading this article I want to invite users for a discussion in my blog

Can google get Gods mind?

This was one argument in 2004.I want to validate this argument with diverse opionions by comparing the current trends of google like the one which is described in the post above

http://ragusivanmalai.blogspot.com/2006/10/can-google-get-gods-mind.html

Come on Google users

[Boyan Josic]

Fred: I am one of the largest google fans and users out there, but I would not get into the stock at these levels. I actually got out after the runup after the earnings were reported. Everything outside of their core revenue model is losing money. Now investing $1.6B for YouTube?

I don't see trouble with Google, it's a great company. But I don't see the stock price shooting through the roof from these levels.

Boyan

[ldorsey]

One of the best tech investors who I know owns GOOG in his top ten holdings. The reason that this information is relevant is because he manages, oh, roughly, $60bn. It could be important to watch him.

[edorsey]

We are hearing that GOOG may be losing some value and viewership before it completes the purchase of YouTube. Viacom has asked YouTube to remove all of its cable network content from the video-sharing/uploading site. Included are popular “Colbert Report” and “The Daily Show” clips that typically equate to the whole show, which are Comedy Central programs. MTV, BET, and other Viacom cable nets have had some of the most-viewed, but illegally submitted, videos on that site. The video clips that are allowed to remain will be short clips. This comes after YouTube had to take down 30,000 Japanese videos.

GOOG and YouTube are possibly facing a new competitor with a legitimate approach to online video, Brightcove. The Company has succeeded with several rounds of VC funding but already has agreements with media conglomerates such as AOL and other parts of Time Warner to manage their online video downloading/sharing/monetization. We still like the Company and the stock but its always good to have additional information.