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Another Reason to Be Wary of Buying Google

An ongoing IRS audit of the search giant is one more headwind


Apple (NASDAQ:AAPL),  Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) offer investors a better value than Google (NASDAQ:GOOG) — even after the shares of the search engine giant got pummeled following its recent disappointing earnings. Google also faces more headaches than many investors realize.

Apple trades at a price-earnings ratio of 15.46. Microsoft and IBM, which both reported better-than-expected earnings, trade at multiples of 10.18 and 14.28, respectively. Google’s p-e ratio is 33.71, the highest levels it’s been over the past five years, according to Reuters. Based on this metric, IBM shares are also expensive versus their historic levels, while Apple and Microsoft appear relatively cheap. Valuation issues aside, investors have several other reasons to avoid Google.

In October, Bloomberg News reported that the IRS is auditing how the Mountain View, Calif. company “avoided federal income taxes by shifting profit into offshore subsidiaries.” Two of the methods — “Double Irish” and “Dutch Sandwich” — sound like pulp crime novels from the 1950s. However, they’re sophisticated strategies that save about $1 billion annually from Google’s worldwide tax bill, according to Bloomberg.

Fast-forward to last Thursday’s earnings report. The financial press mentions that “weakness” in Europe affected Google’s bottom line. While it’s true that the decline in the euro hurt Google along with everybody else, investors shouldn’t forget that having the IRS breathe down Google’s neck might also have an impact, though it’s more difficult to quantify.

It’s in Google’s interest to settle the case, which could cost it hundreds of millions of dollars, quickly. That may involve Google changing its accounting practices. In the fourth quarter, Google earned $5.6 billion, or 53% of its revenue, outside the U.S.

Google also scared investors when it disclosed that the average price per click declined 8% in the quarter. The company blamed foreign exchange rates and changes in the ad formats for the decline. Google’s first drop in that measure in two years came despite record growth in e-commerce during the holidays. Mobile advertising is also proving not to be as lucrative as some expected.

“They are just not getting the same kind of pricing on the mobile side as they do on the desktop,” said Ryan Jacob chairman and chief investment officer of Jacob Funds, which owns Google shares, in an interview with Reuters.

Google doesn’t measure up against its rivals in other ways as well, especially Apple. Fourth-quarter revenue at the search giant rose 25%, well under the 44.8% growth Wall Street analysts expect the iPad maker to report when it issues results this week. The one-year average price target on Google is $725.73, about 24% ahead where it recently traded. Analysts expect Apple shares to soar 22% to $515.53 over the next 52 weeks.

Revenue in Google’s current quarter is expected to rise 26.8% to $8.28 billion and to increase 23.4% in the June time period and 23.9% for the year.  Not bad, but it’s lower than the rates it recorded in 2011. Though IBM and Microsoft are growing at a slower pace, both stocks reward investors with dividends. Big Blue’s yields 1.66%, while Microsoft’s yields 2.80%. Google, like Apple, isn’t sharing any of its cash hoard with shareholders.

Jonathan Berr does not own shares of any companies mentioned here.

Article printed from InvestorPlace Media,

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