How to Kick-Start Google's Stalled Shares

Pity the poor Google (Nasdaq: GOOG  ) investor. We've seen the stock do a sideways crabwalk over the past one, two, and five years, even as the business improved by leaps and bounds:

  Change From 2010 Change From 2009 Change From 2006
Revenue

25%

41%

336%

EPS

17%

88%

340%

Operating Cash Flow

21%

40%

324%

Share Price

0%

21%

29%

Data from Capital IQ, a division of Standard & Poor's, reflecting TTM results and recent closing prices as of 6/16 in the relevant years.

Seems a little unfair, doesn't it? Google shares have gained a meager 29% over the past five years, for a whopping 5% annual return, while sales, earnings, and cash flows all more than quadrupled. Some compression of multiples is normal for any growth stock as it matures -- I mean, we shouldn't expect Google to trade at 65 times trailing earnings the way Baidu (Nasdaq: BIDU  ) does, because the Chinese rival is still in its high-growth phase in a rapidly expanding and virginal home market. But still, this is an extreme example of great results not matching investment returns.

It seems obvious to me that Google is undervalued today, and Wall Street agrees: 35 analyst firms currently have a buy rating on Google stock, versus five holds and not a single seller, according to Thomson/Reuters. The average one-year target price sits at $700, or 40% above current prices.

So what gives? How could Google dispel the doubters and unlock the value that's stored in its shares? I have two ideas.

Explain where all the money is going
Nobody's perfect; one of Google's flaws is a rather opaque operating model.

The company works as a single monolithic business segment, named Global Internet Search Solutions. Into this bucket goes everything: search-related revenues, sales from ad networks not related to search, mobile and multimedia results from properties like Android and YouTube -- you name it, it's in there.

Management is reluctant to break results out in any further detail. Instead, you get cryptic and nearly meaningless statements like these in, say, the year-end earnings call of 2010:

  • "YouTube revenue more than doubled."
  • "Mobile search grew 4 times on Mobile devices for Web browsers in the last year."
  • "Our AdSense revenue was up 22% year over year to $2.5 billion." (Wow, was that so hard to disclose?)

I'd love to see Google sharing its results in greater detail, the way it does with the AdSense ad network. That would help investors get a handle on where the company is going, what the road map looks like, and how those efforts are working out.

For now, we're reduced to listening to analysts and independent market researchers who tell us how Android phones are stacking up against the Apple (Nasdaq: AAPL  ) iPhone or Research In Motion's (Nasdaq: RIMM  ) BlackBerry, and then we can sort of guess how it affects Google itself.

The YouTube acquisition has gotten miles and miles of bad press because nobody knows whether it's making any money. Revenue doubled to what level, exactly, in 2010? How much of that amount trickled down to operating income -- or losses? And so that deal still looks like a $1.7 billion dollar-bill bonfire to many investors. I think they're wrong, but nobody really knows. Why not come out and tell us?

It's somewhat of a Foolish mantra: Greater transparency is better for investors. In this case, I think it's better for the stock as well. And it wouldn't cost a thing to get this done.

Get social -- slowly
It's not that Google hasn't tried its hand at social networking -- it's just that those efforts don't seem to stick.

Socialites such as Groupon, LinkedIn (Nasdaq: LNKD  ) , and, soon enough, Facebook are invading the markets at fanciful valuations relative to unproven and/or ineffective business models. Their grand entrances haven't moved Google shares at all, which tells me that investors don't see Big G competing in the same space. But it needs to.

Search and advertising services form a fine platform for Google from which to launch personalized services. Some pop, like Gmail. Others don't, like Orkut, Google Wave, and Buzz.

Gmail stole email market share from incumbents Yahoo! (Nasdaq: YHOO  ) , AOL (NYSE: AOL  ) , and others -- not because it was just different and Google-branded, but because it was better and introduced in a sneakily viral campaign. Now it's a vital part of Google's push into business-grade services and more personalized and efficient advertising.

Slapping consumers across the face with Wave and Buzz services they never asked for didn't work at all, especially when Google trampled all over privacy concerns in the process. Do less of that and more of the Gmail-style slow introduction, and maybe you'll have another hit on your hands. Case in point: Android got off to a torpid start but has now become the leading smartphone platform in the world -- one inconsequential handset model at a time.

Sometimes slower is better.

Is that all?
There are many other potential catalysts at Google's disposal, from getting cozy with regulators here and abroad to grabbing a serious foothold in TV programming or music distribution. But my two suggestions are at the top of my wish list, and both are well within the company's reach. In fact, the transparency thing should be mandatory.

The Fool has real money invested in Google stock. Grab a free report showing five more stocks worthy of our cold, hard cash, along with a detailed description of what makes them great for your portfolio, too. Whether or not you agree with me on Google's undervalued status, there's something for everyone in that document.

Fool contributor Anders Bylund owns shares of Google, but he holds no other position in any company mentioned here. See his holdings and a short bio. The Motley Fool owns shares of Google, Yahoo!, and Apple. Motley Fool newsletter services have recommended buying shares of Yahoo!, Baidu, Apple, and Google, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. 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.


Read/Post Comments (5) | 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 June 16, 2011, at 8:40 PM, Foolorama wrote:

    Here's kind of a from-the-left viewpoint.

    I actually don't think there is such a wonderful future for Google. Consider the evolution of internet usage from desktops to mobile. Yes, there are those people who need to do research and the World Wide Web is wonderful for that - and we all agree that Google is the best at that game.

    But there is a huge movement toward mobile applications and net-access hardware (read tablets) that use simple apps to provide a subset of the Internet search world. If you're looking for a restaurant, wouldn't it be faster to touch a mobile app called Restaurants or Fast Food or whatever? Subsets.

    I'm a believer that - from a customer point-of-view - the user-friendliness of single purpose applications is a far more accurate, easier to use, search method - devoid of advertisements.

    Plus it's a no-brainer - a proper use of technology to make someone's life easier.

    In such a world, how does search have much meaning for a general audience?

    Now, let's compare Apples to Googles...

    If you are looking at positioning for application-based search, you need look no further than Apple. They are providing the ecosystem that supports this bite-sized approach to the Internet world - fully driven by the need of the user, when the user wants that result.

    So where does that leave Google?

  • Report this Comment On June 16, 2011, at 9:02 PM, websterphreaky wrote:

    MAYBE YOU GOT SOME SUGGESTIONS FOR CrApple and their FLOUNDERING Shares???

    AAPL $325.16 $-1.59 -0.49% on the very same day MSFT was UP 1.05%!

    CrApple has Tanked from a High of $365 in March, NEVER been closer that $345 since and their chart is a DOWNWARD sawtooth, not up.

    I TOLD YOU SO!! I TOLD YOU SO!!! (6 months ago)

  • Report this Comment On June 17, 2011, at 12:23 AM, concealedweaponR wrote:

    i dont think they are stalled they just gained a lot and now of course will down trend a bit

  • Report this Comment On June 17, 2011, at 5:52 AM, TMFZahrim wrote:

    @Foolorama, I'm not sure I agree that a heap of individual apps is more user-friendly than a single search tool that does it all. Example: I use Google search to convert US dollars to other currencies. Could I get a specialized app to do the same thing on my phone? Sure -- but then I'd have to go to the trouble of picking one in a sea of apps doing the same thing, and then actually install it. It's also a hassle to find the right app launcher when I need it. Eh -- search, "100 usd in euro", result: 70.7214 euros. Data provided by Citibank, but I don't really care because Google made it easy. Done.

    That's just one example out of an enormous grab bag. I'm pretty sure there's a large market for this, even in an app-saturated world. And don't forget that Google does much more than just search these days.

    Anders

  • Report this Comment On June 17, 2011, at 1:05 PM, Borbality wrote:

    Well how many Apps are just using Google data anyway? Google is doing a lot of the hard work. Apps are just making it more accessible.

    I don't see how Apple is "providing the ecosystem" besides creating a platform for its phones. Google Maps on a smartphone has pretty much eliminated the need for a regular person to have a GPS at all. iPhone users get Google Calendar.

    Apple sells devices! I don't know why people find this so confusing. It's a different type of company!

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