Inside Wall Street: Google still an enticing tech bet

Despite its stock's continued rise, the global Internet giant remains undervalued.

By Gene Marcial Apr 22, 2013 4:56PM

The Google logo is seen on a podium and projected on a screen at Google headquarters in Mountain View, Califorina Paul Sakuma/AP Whenever a company vigorously leads the pack and its stock continues to hit new highs, it’s almost predictable that investors get embroiled in worry that the good news may not last -- and the gains could dissipate sometime soon.


And so it has been with Google (GOOG). Its stock continues to ratchet higher despite such worries, climbing to another record level at $844 a share in early March 2013. Not surprisingly, many Google watchers and investors have become acrophobic -- anticipating a sharp pullback.  


Indeed, the stock has since edged lower, to $789. “Our concerns are the quality of earnings and gross margin in its core business continue to deteriorate,” says Shaw Wu, analyst at investment firm Sterne Agee, whose rating on the stock is “neutral.” And James Dix of Wedbush Securities, who is also neural on Google, notes that the company’s first quarter results confirmed the “lack of margin growth and visibility.”


But certainly, not everybody is down on Google. In fact, some close watchers have upgraded their price targets and their recommendations on the company.


“We see a number of growth drivers, including mobile, video, and enterprise,” says Scott Kessler, analyst at S&P Capital IQ, who only recently boosted his stock price target by $100 a share, to $925 from $825 --  as he upgraded his rating on Google to a buy from a hold.


With his new optimism on the stock, Kessler increased his earnings estimate for 2013  to $38.35 a share from $36.97, and his 2014 forecast to $43.28 from $40.60. That upgrade is partly prompted by Google exceeding the analyst's first-quarter earnings estimate of $8.75 a share; Google posted earnings from continuing operations of $9.87 a share.


As the No. 1 Internet company, there’s a lot to like about Google; and that liking has  contributed to stock’s steady advance. Google specializes in global search and advertising, making the word Google synonymous with Internet search. And as everyone knows, Google is now casually used as a verb -- to describe searching for anything on the Web.


“This reflects Google’s historically strong focus on the search segment, and the company’s related market-share leadership in many countries around the world, including the U.S.,” says Kessler. But Google has also expanded into many other related businesses that have significantly widened its global reach.


Among them is Google’s entry into smartphones, with its Android mobile Internet software platform, and in Internet browsing with its Google Chrome, and computer operating system, with Google Chrome OS. Google also provides an instant messaging service (Google Talk), and a payment service (Google Checkout).


“We also note efforts to restructure, streamline and focus Motorola,” which it acquired in May 2012, says Kessler. He sees Motorola affecting earnings this year, as its own revenues are expected to be flat in 2013 and increase 5% in 2014. He believes the purchase of Motorola is aimed at fortifying its patent portfolio and protect its key Android franchise.


Another strong bull on Google is Kerry Rice, analyst at investment firm Needham & Company, who has reiterated his buy recommendation on the stock and raised the price target to $900 a share from $850. The increased price objective represents 17 times Needham's pro forma earnings estimate for 2014 of $54 a share on projected revenues of $52.55 billion, up from a 2013 earnings estimate of $46.89 on revenues of $46.30 billion.


Says Rice: “We remain positive on Google, expecting continued strength in Google standalone driven by improved mobile monetization, robust growth in display, driven by migration of brand advertising dollars online, and healthier growth in various geographies and industries.”           

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.

Tags: GOOG


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