Is Google the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Google (Nasdaq: GOOG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Google.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 32.3% Pass
  1-Year Revenue Growth > 12% 27.1% Pass
Margins Gross Margin > 35% 65.2% Pass
  Net Margin > 15% 27.0% Pass
Balance Sheet Debt to Equity < 50% 11.8% Pass
  Current Ratio > 1.3 5.96 Pass
Opportunities Return on Equity > 15% 19.5% Pass
Valuation Normalized P/E < 20 24.95 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With a score of 7, Google shows you exactly the search result you'd like to see. The search-engine giant has inspired innovation since before its IPO, and recent events show that it's not content with treading water based on its past success.

Google has demonstrated that it's the king of its core search business, defeating Yahoo! (Nasdaq: YHOO  ) and keeping Microsoft's (Nasdaq: MSFT  ) Bing under submission. But the company has kept trying to find other ways to broaden its reach.

One big move Google made was to go up against Apple (Nasdaq: AAPL  ) in developing the Android smartphone operating system. The open-source OS now controls more than 40% of the U.S. smartphone market, more than half again Apple's share and taking a big amount of Research In Motion's (Nasdaq: RIMM  ) declining business.

But yesterday, Google made a big move, choosing to buy out Motorola Mobility (NYSE: MMI  ) in a $12.5 billion deal. Fellow Fool Anders Bylund sees the move as a calculated gamble, as Google has to walk a fine line. It can't afford to alienate other partners, such as Samsung and HTC, by suggesting that it could put them at a competitive disadvantage to Motorola devices. Yet at the same time, Google must stand up to Apple and other smartphone competitors in a meaningful way.

What Google has demonstrated in the past is a willingness to take risk and a drive to make its moves work. With so much at stake, whether Google will achieve perfect status could hinge on whether the Motorola deal allows it to declare final victory over its rivals.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Add Google to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Microsoft, Apple, Google, Research In Motion, and Yahoo! Motley Fool newsletter services have recommended buying shares of Apple, Google, Yahoo!, and Microsoft, as well as creating bull call spread positions on Apple and Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (4)

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 August 16, 2011, at 10:16 PM, Spssguy wrote:

    Haha, no. Android is a fail, so is everything but search, really. iPhone will be setting up iOS 5 with bing search and Maps, in all likelihood.

    iPhones are used so much more than Androids (which are 1/2 in sock drawers it seems, or inactivated data plans) that Google presently makes more on selling mobile search results to local businesses than they do from the (seemingly) larger marketshare attributed to the amalgam of Android phones.

    TWELVE BILLION for Moto Mobility? Wow, what a waste of money.

    Now I guess Oracle can value the Android 'business' though, at at least 12 Billion. Otherwise, why would Google pay so much?

    So, now that Google owes another 12+ Billion to Oracle, we will see how it does.

    They really should have licensed Java--Oracle owns it and has a clear case against them.

  • Report this Comment On August 17, 2011, at 2:12 AM, Rogo wrote:

    The perfect stock doesn't go buy some low-margin, no-profit business, add 50+% to its headcount, torch nearly 2 years worth of profits, etc. in the name of building a business unit that currently contributes virtually nothing to its income statement or market cap.

    I mean this piece is just absurd.

  • Report this Comment On August 17, 2011, at 3:21 AM, Davewrite wrote:

    "The open-source OS now controls more than 40% of the U.S. smartphone market, more than half again Apple's share " is shown as a positive for Google but...

    Google makes 1 to 2 billion a year off all non PC platforms. If you minus Google's iOS revenues (Google search is default on Apple's iOS devices) Android probably gives google 1 billion bucks a year.

    Apple easily makes 50 billion plus from mobile a year. (iPhone alone gives Apple 10 billion a quarter not counting iPad, AppStore, iAds etc)

    Apple takes 60% of world cell phone profits of the top 8 phone vendors (i.e Apple makes about double all the Android, Rim, Nokia etc phones put together)

    this is a business site, as far business (i.e money) goes Apple wiping the floor with Android.

    since Android and iPhones launch, Apple stock has tripled, google has stayed flat.

  • Report this Comment On August 17, 2011, at 9:31 AM, jpdal09 wrote:

    So the "Prefect Stock" just got down graded to Sell by S&P?? Oh OK that makes sense

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