Investors have gone gaga over Google (GOOG) this year, with shares of GOOG stock up a juicy 58%. Still, investors may want to be cautious, according to Stifel Equity Research Group’s Jordan Rohan. He currently has a “hold” rating on Google stock.
The good news: Rohan doesn’t think there are fundamental issues with Google. In a recent report, he says that GOOG stock has benefited from the company’s solid positions in fast-growing markets like mobile and video. Besides, Google has the world’s best ad-based monetization system, which seems to magically print money.
Oh, and the company should benefit from the lift of the holiday season as well. Because of these factors, Rohan recently upped his fourth quarter estimate on revenues by $400 million to $16.4 billion and earnings per share to $12.03.
So why is he still a bit dour on Google stock? The reason is simple: About 60% of the spike in GOOG stock has been due to a jump in the multiple, not underlying growth in earnings. This should actually be no surprise, since Wall Street has been pouring money into top Internet plays, such as Twitter (TWTR), Facebook (FB), Yelp (YELP) and Pandora (P).
But the momentum for Google stock and other Internet plays can easily come to an abrupt stop, especially if there is weakness during the upcoming quarters.
Google Stock Could Sputter
There are also some other things to worry about for GOOG. Let’s face it, the acquisition of Motorola has turned out to be a dud. Despite spending millions on the Moto X phone, it appears to have gotton lukewarm response from customers. The result could be continued losses for the Motorola division, which may weigh on the Google stock price. As seen with operators like Nokia and BlackBerry (BBRY), the handset market can be brutal — and a money pit.
Something else that could be a problem for GOOG stock is that the organization may be getting overstretched. While it has been impressive that Google has been able to continue its innovative ways — such as with driverless cars and Google Glass — there is still the risk that management will get distracted. This is something that has plagued many tech operators like Cisco (CSCO) and could be bad for Google stock in coming years.
But again, the most glaring red flag is the valuation of GOOG stock. Shares of Google stock are currently trading at a P/E ratio of 30, which is certainly rich. Consider that Apple (AAPL) and Microsoft (MSTF) sport multiples of only about 14. These companies also have decent dividend yields.
So in light of this, it will be pretty tough for GOOG to have a repeat performance of its 2013 gains … and it would not be a surprise if Google stock has some type of pullback.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
