Google (GOOG) has been disappointing in 2014, with the tech stock posting gains of less than 3% vs. about 6% profits for the S&P 500 since Jan. 1.
It’s easy to see why, with negative headlines that include:
- A recent Google earnings miss thanks to big spending on pet projects like self-driving cars, and ad rates that continue to decline. This comes after a similar miss in May with its Q1 report.
- Privacy concerns, as embodied by the fact that the tech giant has had to start scrubbing search results in Europe.
- A stock split that firmly consolidated power in the hands of founders Larry Page and Sergey Brin, marginalizing the votes of regular shareholders.
However, the bearishness on Google stock is overdone in my book.
GOOG stock might have underperformed in the last few months, but here are five reasons to get into Google now:
Click to Enlarge Core Ad Biz Is Strong: While alarmists like to draw parallels between Google and the struggling ad business of Yahoo (YHOO), the reality is that Google is much better off. While it’s very true that GOOG is facing a secular decline in advertising rates, the company has managed to swim upstream simply by ramping up volume. Case in point: This pairing of charts, courtesy of BusinessWeek, that illustrates just how much clicks have grown even as the cost per click has declined. This might not afford much growth in ad revenue going forward, but it certainly ensures stability while other business ventures ramp up.
Smartphone Domination: Google’s Android OS was present on 85% of the world’s smartphone shipments last quarter. That’s simply staggering — and what’s even more amazing is that GOOG could tighten its grip on market share in the months and years ahead. That’s because Microsoft (MSFT) recently announced that its hardware partnership with Nokia (NOK) will change gears, moving away from “dumbphones” … and without these cheap handsets, the only real entry-level option for lower-class consumers is a cheap Android phone powered by Google. Considering the majority of Nokia’s 250 million units sold in 2013 were dumbphones, Microsoft’s move just resulted in huge gift to Google stock in the form of more potential Android sales. And considering Google’s app marketplace is now more active than Apple’s (AAPL), this market share is sure to result in real revenue growth over time.
Valuation: Based on FY2015 earnings forecasts for GOOG stock, the company is trading for a forward price-to-earnings ratio of about 18 right now. That’s a bit high, sure, but consider that the forward P/E of the entire S&P 500 is about 16.5 right now — and historically, Google stock has traded for an earnings multiple in the mid-20s as recently as a few years ago. At worst, you can say that GOOG is fairly valued at these levels — something that can’t be said for some other tech giants like Twitter (TWTR) that sport a nosebleed valuation and have no room for error.
Cash King: With roughly $60 billion in cash and short-term investments on the books and operating cash flow of more than $18 billion last year, there are fewer companies on Wall Street more stable than Google. But it’s not just stability that investors should be attracted to. With a history of ambitious acquisitions for both technology and talent, Google is agile and has deep-enough pockets to be seen as a serious competitor in almost any field of technology.
New Tricks: Earlier this year, Google announced plans for a smart contact lens that could help diabetics monitor their blood sugar. It’s a speculative idea, for certain, but has mammoth potential given the market need. Other ideas like Internet access via Google Fiber continue to connect with consumers and are starting to drive real revenue. Google’s CFO recently called this wide array of new ideas a “horse in every race” strategy … and while advertising reigns supreme at GOOG stock now, who knows what the future will bring? Just look at the “Other” line on the tech giant’s revenue breakdown. Sales in this category more than doubled from 2012 to 2013, going from just under $2.4 billion to almost $5 billion. Furthermore, those “other” revenues are more than triple the $1.4 billion from fiscal 2011. That trend should only grow, diversifying revenue sources for GOOG stock as well as providing growth opportunities.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.