A Great Stock for the Next 10 Years

Like you, I hate losing money. So to protect and grow my capital along my investing journey, I like to find strong companies with rock-solid balance sheets that are attractively priced. Using that criteria, I believe Google (Nasdaq: GOOG  ) will be a great investment over the next 10 years.

Strong company
You may know Google as an Internet search engine, but it's actually the most successful online ad agency today. Its search engine is the conduit for customers to bid to place advertisements in the form of links associated with keywords, and business is booming.

According to search data from comScore, the company controls the lion's share of the market. Among the big three search engines, Google had 62.6% of the market compared with 18.9% for Yahoo! and 12.7% for Microsoft's Bing.

As more people use Google to search for information, more customers want to advertise with Google. Over time, Google gathers more and more data and keeps its search engine relevant. That's a powerful feedback loop that keeps Google out in front of the competition.

Rock-solid balance sheet
As the leader, Google prints cash. Google produced $8.4 billion in free cash flow in 2009, ending the year with $24.5 billion in cash and short-term investments on its balance sheet and no debt. Wow, that's impressive.

To give you an idea of just how spectacular Google's balance sheet is, I ran a screen looking for companies with at least $10 billion of cash and less than $1 billion of debt. Only two non-financial companies have balance sheets in Google's rarified air: Apple (Nasdaq: AAPL  ) and Qualcomm (Nasdaq: QCOM  ) . That is some impressive company as those two market-leading businesses produce tons of cash.

Attractive price
A great business does not necessarily make a great investment. If you pay too high a price, your chances of earning exceptional risk-adjusted returns goes down. Few would argue against General Electric's being a great business. But if you bought shares between 2000 and 2008, you're not a happy investor today.

So what we want to do is make sure we're getting an attractive free cash flow yield, which is free cash flow divided by market cap. That way we can use the 10-year treasury rate, currently 2.95%, as a benchmark for return and risk. Let's compare Google's yield with those of some other great companies.

Company

FCF Yield

Google

5.8%

Apple

5.2%

Qualcomm

6.6%

Amazon.com (Nasdaq: AMZN  )

4.4%

Netflix (Nasdaq: NFLX  )

1.6%

That's an impressive list of companies. Qualcomm and Google top the list as attractive from a free cash flow standpoint. With a 5.2% free cash flow yield, David Einhorn's recent purchase of Apple makes a little more sense now. Amazon's yield is a little low, in my opinion, and it seems investors are paying a very hefty price for shares of Netflix today.

The Foolish bottom line
Sometimes the market misprices great companies, giving investors the opportunity to earn great returns with less risk. Sure, the companies mentioned above have one or even two of the aforementioned qualities, but Google, in my opinion, has the complete package. Google is the online ad-placement leader, has plenty of growth ahead of it, a strong balance sheet, and trades at an attractive price. That gives me plenty of confidence that Google will be one of the best investments over the next 10 years.

Million Dollar Portfolio co-associate advisor David Meier owns a Fender Stratocaster but does not own any of the companies mentioned. Google is a Motley Fool Rule Breakers recommendation. Apple, Amazon.com and Netflix are Motley Fool Stock Advisor picks. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2010, at 6:14 PM, CPACAPitalist wrote:

    Netflix is trading at crazy prices, and I think its a great product buy the price has to come down eventually to a more reasonable level.

    I like MSFT more than Google. It has roughly $37B in cash, $4B in debt, and a FCF of about 7.35% - making it a better deal with an at least as attractive cash position as Google. MSFT pays a dividend and Google doesn't, yet maintains a cash position thats comparable. MSFT is also trading at a lower P/E currently. Its a rock solid company, with good management, a wide moat, and just as good potential as Google. So why hype up Google so much and not mention Mr. Softy?

  • Report this Comment On July 20, 2010, at 6:44 PM, stan8331 wrote:

    The big differentiator I see amongst those names is Netflix is a far smaller, less mature company than any of the others listed. It doesn't really make sense to expect a big free cash flow / market cap number from a young company that's still making a lot of capital expenditures to grow the business. The numbers shown here for Google, Apple and Qualcomm are excellent, but this metric doesn't imply that Netflix is an inferior or overpriced company. There is an argument to be made that Netflix is currently overpriced, but this specific comparison is four pumpkins to a cherry tomato.

  • Report this Comment On July 20, 2010, at 7:40 PM, ScottSemple wrote:

    Why would you use a free cash flow metric for companies that don't pay dividends? Even if they are producing a lot of cash, they're not returning any of it to investors.

  • Report this Comment On July 21, 2010, at 12:07 AM, Fool wrote:

    David,

    As a fellow investor in GOOG, I agree that it has great potential for the next decade. The question on my mind (and I'm sure many others as well) is what they have planned to do with that $24.5 billion in cash.

    Hoarding cash is great for the balance sheet, but I would like to see it put to use for the benefit of shareholders. Google has lots of options to pick from: buybacks, acquisitions, or even paying a dividend (http://boards.fool.com/Message.asp?mid=28540062).

    I'm eager to see what their plans are in the coming years.

  • Report this Comment On July 21, 2010, at 8:53 AM, Gregeph wrote:

    Good article. For a good discussion of Google's competitive advantages see the book "The Curse of the Mogul". One of the authors is value investing guru and Columbia prof Bruce Greenwald. The book makes the case that Google has three forms of competitive advantage: economies of scale, customer captivity, and cost. For links to some good articles on Google by Henry Blodget see http://gregspeicher.com/?p=577. Finally, for a look at how value hedge fund guru Glenn Greenberg values the stocks see http://gregspeicher.com/?p=115

  • Report this Comment On July 21, 2010, at 10:40 AM, MikeCoop wrote:

    Yeah, Google looks great ,but even if they did a 4:1 split it would be an expensive stock. Definitely out of my range.

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