GOOG vs. YHOO – Which Is a Better Bet In Your Search for Profits?

by Dan Burrows | December 13, 2013 11:39 am

GOOG vs. YHOO – Which Is a Better Bet In Your Search for Profits?

Google (GOOG[1]) — the sprawling giant of search – is up more than 50% for the year-to-date, and GOOG stock looks to have plenty more upside ahead.

fightboxerbattle185 GOOG vs. YHOO   Which Is a Better Bet In Your Search for Profits?But Yahoo (YHOO[2]), under CEO Marissa Mayer, appears to have risen from the dead. Heck, YHOO stock has doubled so far in 2013 — something that was once unthinkable for a supposedly moribund tech brand. Like GOOG, next year promises to be another good one for YHOO stock.

GOOG had another strong year, with earnings per share (EPS) forecast to increase 18% on a 40% jump in revenue for all of 2013.

YHOO, meanwhile, is set to string together a second straight year of profit growth. Full-year EPS is forecast to rise 25% even as revenue remains essentially flat.

Yahoo stock may have won this round, but that doesn’t automatically mean it will trounce Google stock next year too.

To see which of these tech titans is the better bet for 2014, let’s look at some of the headwinds and tailwinds for Google stock and Yahoo stock in 2014:

GOOG Stock – More Mobile, More Money

google logo GOOG vs. YHOO   Which Is a Better Bet In Your Search for Profits?GOOG is dominant in desktop search, but the future is in mobile — and Google is crushing it there, too.

The Android mobile operating system is a world-beater, grabbing global market share at every turn. That’s a positive trend for Google stock that will continue in next year and beyond.

At the same time, GOOG is never content to stand pat on the product front. Thanks to Google Glass, GOOG is already vying for the lead in the potentially hot new category of wearable computing. And GOOG is forever tweaking and updating search and maps to solidify their market-leading positions. Even Google’s social network Google Plus is starting to gain some traction.

Be forewarned however that when looking at relative valuation, Google stock is hardly on sale. The forward price-to-earnings multiple of 21 isn’t particularly rich for a stock with a long-term growth rate of 16% — but it is well above the five-year average for Google stock.

It’s also a concern that the GOOG stock price is rising faster than its growth prospects. Yes, Google deserves premium multiples, but that doesn’t mean you’re necessarily getting a bargain.

YHOO Stock – Alibaba and Optimism

yahoo logo GOOG vs. YHOO   Which Is a Better Bet In Your Search for Profits?The two biggest drivers behind YHOO stock this year have been its incredibly valuable stake in the Chinese e-commerce company Alibaba, and greatly improved sentiment stemming from CEO Marissa Mayer.

YHOO has a 24% stake in Alibaba, which is not only a cash cow, but will be worth a fortune when it goes public. An initial public offering in Alibaba would make the YHOO stake worth $36 billion, according to estimates.

Additionally, the market is bullish on Mayer’s leadership, and improved sentiment leads to multiple expansion.

Mayer’s product-focused turnaround does appear to be delivering results. Monthly users of Yahoo are up 20% since she took over in the summer of 2012. Even more important, the YHOO mobile user base jumped 15% in the most recent quarter.

Then there’s the acquisition spree YHOO is making under Mayer, the most notable of which was when Yahoo acquired Tumblr.

However, like GOOG stock, YHOO stock is no bargain. Indeed, it looks very expensive — and maybe overpriced. A new investor in YHOO stock is going to pay 24 times forward earnings for a long-term growth forecast of less than 14%. That’s a premium to the five-year average for YHOO stock. It also means the Yahoo stock price is rising twice as fast as the YHOO growth forecast.

The Verdict – GOOG Stock or YHOO Stock?

winnerslosers185 GOOG vs. YHOO   Which Is a Better Bet In Your Search for Profits?Just as we picked GOOG over AMZN[3] for 2014, we’re going for Google stock over Yahoo stock, too.

Google stock is not only cheaper, but the company has much stronger fundamentals. Furthermore, GOOG is a growth machine, especially on the top line where YHOO is still very much struggling.

YHOO stock is also likely to underperform vs. GOOG stock in 2014 because it had such a hot run this year. It’s very unusual for a stock or sector to follow up a year of triple-digit-percent returns with yet another one of screaming outperformance.

Indeed, usually there’s a hangover effect, where the top stocks and sectors of one year tend to underperform the next. Just look at what happened with real estate investment trusts (REITs) this year after a torrid 2012.

Lastly, when it comes to Yahoo stock, the Alibaba IPO and improved sentiment on thus-far successful turnaround efforts looks to have been baked in — and then some.

That doesn’t mean that YHOO stock can’t have another great year in 2014 … just that we expect GOOG stock to have an even better one.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  2. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  3. we picked GOOG over AMZN: http://investorplace.com/2013/11/goog-stock-amzn/view-all/

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