Inside Wall Street: Why Google will reign supreme

With some expecting shares of the world's largest Internet company to soar above $1,000, the recent pullback is welcome news to opportunistic long-term investors.

By Gene Marcial May 31, 2013 8:44AM

The Google logo is seen on a podium and projected on a screen at Google headquarters in Mountain View, Califorina Paul Sakuma/AP When shares of Google (GOOG) rocketed to an all-time high of $919.98 a share in mid-May 2013, a wave of profit taking followed, pulling the stock back to $870 by May 30, 2013. That spawned a plethora of bearish forecasts suggesting that the stock has crested and was long overdue for a steep decline. They argued that the stock, after all, has had a great run since late June 2012, when it traded at about $564.

So now, investors are confronted by the inevitable question: Is Google doomed -- and will it go the way of Apple (AAPL), whose stock has plunged to $392 a share on April 2013, down from its record high of $702 in September 2012?

Don't be fooled. Not a few among the close watchers of Google are convinced the stock will snap back and soar to more than $1000 a share in 12 months! That's not wishful thinking, according to these pros, who postulate that fundamental as well as technical factors support their rosy outlook.

"We view Google as a best-of-breed company on the Internet and continue to believe that Google's suite of web services will drive deeper user monetization going forward," says Anthony DiClemente, analyst at Barclays Capital. In addition, the company's "philosophy for developing innovative technology solutions across verticals provides investors with implicit call options on potential major innovations, such as Google Glass, and self-driving cars," he points out.

Rating the stock as "overweight," DeClemente says that as the stock market surges and price-earnings multiples continue to expand, "we prefer to own Google shares in light of the company's strong growth prospects, solid operating margins, and reasonable valuation," compared to its large-cap Internet peers.

The analyst's price target for Google is $1,000, or 21 times his 2013 earnings estimate of $47.15 a share. The projected multiple, he notes, "represents a discount to broader large-cap Internet stocks," which trades at 35 times his estimated 2013 earnings per share. For 2014, DiClemente expects Google will earn $53.93 a share. The company earned $38.88 in 2012.

Google is best positioned "for the shift to new media due to its dominant position in search, strong exposure to mobile, and increased traction with its display initiatives," argues DiClemente.

Analyst Colin Sebastian of investment firm Robert W. Baird recently raised his price target for Google to $1,025 a share from $830 based on his projection of 12 times his enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization), and 20 times his estimated 2013 earnings of $45.40 a share. For 2014, he expects earnings of $51.49 a share, which equates to 17.8 price-to-earnings multiple.

Describing Google as the dominant leader in the online advertising market, Sebastian says the company is poised to benefit from the "ongoing secular growth tailwinds in search and display advertising, as well as the explosion of the mobile web." And based on its reported advertising-related revenues, he notes that Google is the largest media company, "having single-handedly driven search advertising to the mainstream." In his view, Google is poised to benefit even further from a "healthy search business, rapid rise of the company's display ad platform, and leading market share on mobile devices."

And let's not forget YouTube's enormous impact. "YouTube remains one of Google's leading net assets, and remains an underappreciated asset," notes Mark S. Mahaney, analyst at RBC Capital Markets, who rates the stock as outperform. He emphasizes that YouTube is "one of the best plays on the migration of TV ad budgets Online."    

He figures that given YouTube's "very large scale and innovation track record," he estimates it could generate up to $58 billion in revenue in 2013, with the "new Paid Channels offering an additional $1billion long-term revenue opportunity."

Mahaney believes investors still under-appreciate the "high level of innovation" at Google. He notes that at Google's recent I/O developer conference, the company demonstrated that innovation continues to drive the company. "While that innovation rarely shows up as a catalyst in any one financial print, it does show up in a consistency of top-line growth over the years despite significantly shifting industry trends," says Mahaney.

And he argues that Google's valuation continues to be attractive, given RBC Capital's projected growth rates as well as the stock's trading history. Mahaney notes that "Google has -- along with Priceline (PCLN) -- the most attractive valuation on a growth-adjusted basis with shares currently trading at a less than 1.0 price-to-earnings-to-growth (PEG) ratio."

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Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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May 31, 2013 10:17AM

Microsoft should give away Bing advertising for free in response to Google's free Android.

May 31, 2013 10:08AM
Google search has continually gotten worse and that's their bread and butter. Why anyone new hasn't become a serious threat to a cleared flawed search model, that's a mystery.
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