Google Shows Off Rock-Hard Reliability

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At a time of slow growth in the world economy, companies that can generate robust, organic growth through innovation stand out from the crowd. After blowing away earnings estimates after the bell Thursday, it’s clear that Google (NASDAQ:GOOG) is doing just that.

The tech giant soundly beat estimates on both the top and bottom lines, delivering $7.51 billion in revenues — versus estimates for $7.22 billion — and reporting an EPS of $9.72 that obliterated the consensus $8.74. The company continues to dominate the search business, and it threatens to render Yahoo (NASDAQ:YHOO) and Microsoft’s (NASDAQ:MSFT) Bing irrelevant in this still fast-growing segment. Paid clicks rose 28% (versus expectations of 17%), its mobile business more than doubled from a year ago, and the company reported over 40 million users for its Google+ social network. Even CEO Larry Page said he was “taken aback” by the popularity of Google+, which is only four months old.

It’s this kind of growth that makes Google safe to own as we await more clarity on the outlook for the global economy. Google is one of premiere companies in the small universe of stocks that can reliably grow through the worst-case economic scenario. The stock certainly isn’t immune to the risk on/risk off trade, as gauged by its 20% decline in the July-August correction, but its strong growth profile makes it a name that institutional managers can own without concern for “career risk.” This helps make Google a strong candidate to outperform if we hit another rough patch before the end of the year.

Google GOOG
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Companies that put up the kind of numbers we’re seeing from Google should warrant a premium multiple, but the stock still isn’t trading far above the broader-market P/E. Prior to Thursday’s report, Google was changing hands at just 13.3 times 2012 estimates — versus about 12 for the S&P 500 — and a PEG ratio of 0.8. Even after the post-earnings run-up, the stock is reasonably priced given its growth prospects and rock-solid balance sheet. On this basis, one could argue that Google doesn’t deserve the performance gap it has experienced versus Apple in the past two years.

Investors fret about the company’s speculative — and sometimes just plain odd — initiatives that increase costs without providing much hope of a near-term bottom-line impact. In a perfect world, Google would put its cash to work with a dividend or share buyback rather than financing the creation of driver-less cars. But the company is disciplined in its endeavors and has the cash to withstand its share of bad bets. The extraneous costs are just part of the overall picture, and they shouldn’t distract investors from the growth in Google’s core businesses. Further, look at it this way: The expectation for poor capital allocation is already well known and discounted in the stock, but the possibility that Google might surprise us with a dividend or buyback isn’t. This indicates that the risk/reward trade-off with respect to the issue of costs is firmly skewed to the upside.

Google GOOG
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The chart also is in a very strong position here, which isn’t something that can be said for most stocks in the market right now. Google has met strong resistance in the $620-$640 range in the past two years, but now the stock appears to be set to make another assault on that level. From there, it’s a straight shot with little resistance to its late 2007 high above $740. Naturally, this probably won’t occur without the help of a benign to positive tape.

In the short term, the best bet probably is to let Google shares give back some ground from their post-earnings rally before getting in on the action. The stock was trading at $480 just a little more than a week ago, which makes it a dangerous time to chase it higher. Still, Google is one of the few stocks in the market for which everything is working and — even more important — where the macroeconomic outlook appears to have little impact on results.

As of this writing, Daniel Putnam did not have a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/google-shows-off-rock-hard-reliability-goog-yhoo-msft/.

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