Google Has a High Bar to Clear

Google is a much-loved momentum stock heading into 2014, but can it clear the high bar that's set for it?

Jan 1, 2014 at 11:00AM

Shares of Google (NASDAQ:GOOGL) have been on a veritable tear over the last year. Although seeing a stock double is not uncommon in this market, especially in the land of small-cap tech, seeing a $185 billion company grow into a $370 billion company is quite rare. Unfortunately, while this is great for investors who purchased shares at $500 or so, the investment case becomes much trickier to justify at north of $1,100.

Google has lofty expectations to meet
Google isn't particularly expensive. It trades for 21 times fiscal 2014 estimates. This certainly isn't cheap, but in return, investors are buying a pretty robust growth story. To put this growth in perspective, Google is set to grow its top line by a whopping 39.7% over 2013. If the analyst community has it correct, it should grow another 16.4% in 2014.

This is superb growth, particularly from a $59 billion revenue base. But it is also important to note that these estimates aren't based on management guidance, but on sell-side estimates that vary pretty wildly. Consensus for fiscal 2014 sits at $69.43 billion, but the estimate range goes from an ultra-frothy $79 billion to an uber-bearish $54 billion, which would represent a very unlikely year-over-year decline.

However, it could meet those expectations
The numbers are interesting, but what will drive Google's results going forward? How does Google get there? The most obvious answer is the continued growth in the company's core advertising business. While there's a lot of buzz around Google's Android platform, as well as its devices business through its acquisition of Motorola Mobility, this isn't what pays the bills, not by a long shot.

This represents an interesting opportunity. The core revenue streams from Google's sites and partner sites -- which make up more than 90% of revenue -- are safe and growing. This means that any incremental opportunities, such as success with Motorola Mobility or Google Glass taking off, could be icing on the cake.

The Apple comparison
A popular comparison to Google has been Apple (NASDAQ:AAPL). Why? Well, Google makes the Android OS and it makes smartphones, so naturally, Apple is a competitor. Android-powered devices do fight Apple's iOS-based devices in the market, and Motorola's own devices sell against Apple's products, but the comparison on a valuation basis isn't valid.

In particular, some claim that Google at a P/E of 30 would be overvalued compared to Apple with a P/E of 14. However, Google's top and bottom lines are growing like crazy, while Apple's top line has seen much slower growth and its bottom line contracted during its fiscal 2013. If Apple was growing like Google, then it would have a multiple like Google's. Alas, it doesn't because it isn't.

Foolish bottom line
The bottom line is that Google is a very high-quality growth company and it deserves a richer multiple than even the mighty Apple. How much richer remains to be seen. But if the company can actually hit consensus for fiscal 2014, then it doesn't look all that expensive today at 21 times those estimates. Sure, it's not a deep-value stock. Frankly, it's hard to see a significant amount of upside from here, and one slip or miss sends estimates and the share price down. It's not the sure-fire bet that the bulls think, but Google isn't quite the bubble that some paint it to be.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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 Motley Fool has a disclosure policy.

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