Our Top 5 Tech Stocks for 2011: Google

This article is part of Our Top 5 Tech Stocks for 2011 series.

I lucked out this time.

When our editors asked Foolish writers for their top tech stock ideas for 2011, only one ticker was on multiple wish lists. After an ugly battle royal in the Fool rotunda with lots of pulled hair, torn ligaments, and bruised egos (not really, but go with me here), I was chosen to explain why we were fighting over Google (Nasdaq: GOOG  ) . It pays to be a 6-foot-5-inch, 240-pound Viking sometimes. Also, maybe I got dibs for crushing the competition in last year's tech roundup. Who knows?

Google in a nutshell
While the reasons to admire Google and its stock could fill volumes, the top three arguments in its favor are these:

  • Moat: Many have tried to challenge Google's core business, and all have failed.
  • Value: This is a dirt cheap blue chip with tons of locked-in value.
  • Innovation: This giant ain't done growing yet, and the key to future growth lies in fresh thinking.

The tech sector is full of delectable treats for the intrepid investor. Microsoft (Nasdaq: MSFT  ) might match Google's deep-discount valuation, Apple (Nasdaq: AAPL  ) might claim a wider moat thanks to legions of rabid fans, and you could argue that Universal Display (Nasdaq: PANL  ) depends on innovation more than Google does. But I dare you to find one stock that combines all three of these elements into one no-brainer like Google does.

Grow, grow, grow your moat
Thanks to its eponymous search service, Google is a concept, a myth, a dictionary word. No matter how often Microsoft tells me to "Bing and decide," you can't convince me that Bing is a verb. Apple may be synonymous with "great design" but that's not an easy concept to bake into everyday English: "Man, the Chrysler building is so Apple!"

That may not sound like an obvious business advantage, but think about it for a second. When the brand name becomes this enmeshed in the collective consciousness of consumers, what do you think you'll type into the browser the next time you're looking for information? That's right -- Google. This phenomenon started years ago and is still growing, and that branding power is a big part of Google's money-making mystery. Without it, the AdWords/AdSense advertising machine would never have been the money-minter it is today, nor would Google have a platform from which to launch all of its other business projects. We'll get back to this under the "innovation" header below.

It's a deal, it's a steal
I don't know if you've noticed this, but Google's business has been growing a lot faster than its share price.

Over the past three years, sales have increased by 22.5% per year, earnings grew faster than that, and free cash flow has doubled every year. If stock valuation is based on cash flows (and most value investors would tell you that it is), you would expect Google's shares to follow suit in some fashion.

But no -- Google's share price has increased by a measly 12% over the last three years, barely beating the Nasdaq's breakeven performance. The dichotomy between strong cash flows and slow stock returns has created a value monster. In the words of fellow Fool Tim Beyers, "Google today is valued as if it'll never achieve better than 3% cash flow growth from here till eternity."

The market's built-in weighing machine will eventually overrule the voting machine. Google is worth a lot more than the market cap you see today.

Never stop moving forward
You won't find Google resting on its laurels for long. Plain old search services are still important and drive the majority of Google's sales, but that won't always be the case.

Mobile ads already account for $1 billion of sales on an annualized basis, in large part thanks to the rise of the Android mobile platform. In one partnership with Dish Network (Nasdaq: DISH  ) , Google sells TV advertising on some of Dish's channels. In another TV-related effort, Google TV has made its retail debut on hardware by Sony (NYSE: SNE  ) and others. But that obvious stuff is just the tip of the iceberg.

Google is doing research on electric cars and alternative energy. It's getting involved in international politics in a big way. When Google and Verizon (NYSE: VZ  ) speak out about how Internet traffic should be regulated, competitors and Congress alike shudder -- and they listen.

In short, Google is still busy innovating -- and acquiring at will when somebody else has a great idea. The R&D budget grows relentlessly quarter by quarter, which to me is a great sign of a healthy tech business. The Larry, Sergey, Eric triumvirate at the top intend to work together until 2024, and I assume they have a master plan that looks nothing like the Google you see today in the end.

The final verdict: Buy now
Google is a long-term buy and hold if I ever saw one. The longer you hold it, the stronger your returns will be when all is said and done. It's also a severely undervalued stock, and I wouldn't be surprised to see it make a leap next year. Whether you're investing for great returns in 2011 or with a decades-long horizon, I'm sure you want some Google in your portfolio.

Do you agree? Share your thoughts in the comment box below.

To access the full list of Our Top 5 Tech Stocks for 2011, click here.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Google and Microsoft are Motley Fool Inside Value recommendations. Google and Universal Display are Motley Fool Rule Breakers choices. Apple is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. 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. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (6) | Recommend This Article (32)

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 December 14, 2010, at 5:39 PM, naandrews wrote:

    Anders,

    Great article, music to this GOOG shareholder's ear.

    One thing you didn't really discuss in your article that I'd like to hear your opinion on is why this great growth company has become a value stock; is it simply because it's out of favor (for whatever reason)? Or is it too big already such that people are unwilling to give such a large cap company a high PE multiple? Or skepticism that all these other non-search projects will ever come to fruition?

    I think that ultimately we will have a trillion-dollar market cap company.

    Maybe GOOG will be it?

  • Report this Comment On December 15, 2010, at 10:39 AM, TMFZahrim wrote:

    @naandrews, what's so great about Google is that it's both a growth and value investment right now. The business speaks for itself and clearly qualifies for the "growth" moniker. Somehow the market fails to see it, which is why it's also a great value. One of those infamous mismatches between market value and true value.

    Trillion-dollar caps will eventually happen. Just give it a few years, and I bet Google will be in the mix down the line.

    Anders

  • Report this Comment On December 15, 2010, at 11:29 AM, Northerngrinder wrote:

    Anders,

    'Google today is valued as if it'll never achieve better than 3% cash flow growth from here till eternity.'

    Being a value-oriented investor, this statement got me excited, so much so that I ran to construct a DCF Model. Unfortunately, the results were disappointing. After setting the free cash flow growth rate to .03, I ended up with an intrinsic value of $251/share! After toying around with the model a bit, I found that GOOG is priced as though free cash flow growth is 10% for here until eternity. While this may still indicate value, it's nowhere near the mind-boggling value Tim indicated... unless I missed something.

    Did I miss something? What models or forumla was used to determine this value? I'm always looking to add tools to my belt, especially if my tool broken.

  • Report this Comment On December 24, 2010, at 2:18 PM, lambsfool wrote:

    Anders,

    I've got to admit I have been kicking myself for years for not buying Google early on. Way back in ancient history, when Google was hovering around 300, I opted for a lower price per share stock called Apple.

    Now --- I'm still kicking myself somewhat, but seriously considering purchasing the mighty GOOG.

    What I've yet to uncover is whether it's wise to buy only a few shares since the PPS is so darned high.

    My hubby says its better to buy more shares. My old style was to buy what I could, even if it was only 10 shares because dollar for dollar, it still adds up and grows.

    I've never asked others for their theory -- but I had a broker try to shame me for this madness. He seemed to figure that if you could only buy a couple shares, it wasn't worth it.

    What do you say? If Fool's can only buy 8 shares of a given stock, do you advice to go for number of shares or dollar value?

    I know it seems nuts, but 5 shares is about $3000, so it's still a good investment to me. What do you guys think?

  • Report this Comment On February 28, 2011, at 7:44 PM, markd4lyph wrote:

    @anders,

    No one laughs at buying 5 ounces of gold do they?

  • Report this Comment On February 28, 2011, at 7:45 PM, markd4lyph wrote:

    oops I meant to direct that at lambsfool

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