by Dan Burrows | September 26, 2012 7:30 am
Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) might be hogging the limelight these days for reasons both good and bad (iPhone 5 for the former; IPO flop for the latter), but Google (NYSE:GOOG) has been the true tech star of the second half of 2012.
Shares in Google have jumped more than 30% since the end of June, beating Apple and the broader Nasdaq Composite by about 16 and 24 percentage points, respectively.
Heck, at more than $762, Google is setting new all-time highs, having blown past its previous record close of nearly $742 set back in November 2007.
The remarkable rally has boosted Google’s market cap to $249 billion, making it the fifth-largest company in the U.S. market, behind Apple, Exxon Mobil (NYSE:XOM), Microsoft (NASDAQ:MSFT) and Wal-Mart (NYSE:WMT).
At this rate, Google could overtake Microsoft and Wal-Mart in short order. But should you buy Google as it’s hitting all-time highs? To help decide, let’s look at the pros and cons:
Cash Cow. Google generated $4.3 billion in cash flow in the latest quarter, notes InvestorPlace’s Tom Taulli, putting it on track to gush more than $12 billion in cold hard cash this year. That’s more than twice as much cash as Facebook has revenue — and on Wall Street, cash is king.
Market Dominance. Google’s primary power source is its hugely lucrative search business, which currently enjoys a hefty 60% market share. Indeed, the company’s place in search is so dominant that a large number of advertisers have built their marketing campaigns around Google’s search engine. As hard as it has tried, Microsoft’s Bing search engine is still an also-ran, and a potential threat from Facebook is still notional at this point.
Valuation. At 15.4, Google’s forward price-to-earnings ratio (P/E) still trades at a 20% discount to its own five-year average, and that’s even after the stock has gone vertical in the last couple months. Back out the $127 a share in cash, and the stock is cheaper still. And if you balk at the fact that Google is still pricier than the broader market, well, its growth forecast is about 50% greater than that of the S&P 500.
Technical Hurdles. Google’s run has left it looking a bit overextended in the near term, notes InvestorPlace contributor Joseph Hargett. True, any pullback could draw in “bargain hunters” with support around $700 a share, but that’s a good 8% decline from current levels. After all, the stock has come very far, very fast.
Motorola. As InvestorPlace’s Taulli notes, yes, Google’s Motorla acquisition has provided some advantages, but it’s also fraught with risk. Integration hurdles, lower margins and Motorola’s lack of profitability would challenge any management team. As has become all too clear with struggling companies like Nokia (NYSE:NOK) and Research In Motion (NASDAQ:RIMM), the mobile device business can be fickle and unforgiving.
One-Trick Pony. A long-time knock on Google is that it hasn’t been able to sufficiently monetize its diversity of projects, products and acquisitions. Sure, search is a hell of pony, but much bigger revenue contributions from YouTube, Chrome and the burgeoning tablet industry would go a long way toward making investors feel safer about the future.
The compelling valuation, gushers of cash and market dominance make Google a buy, even amid this remarkable rally. It’s mighty hard to find stocks that offer growth at a reasonable price these days.
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.
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