It's Never Too Late to Buy Google

With Google (NASDAQ:GOOG) shares hitting an all-time high on Monday, it's awfully tempting to look away. Investors who got in on the $85 IPO three summers ago are sitting pretty on a juicy six-bagger.

Unfortunately, betting against Google is a lot like being Sisyphus -- pushing that boulder up the hill, only to see it come rolling right back down again.

That boulder brings me to Boulder, Colo., where Mac Greer sat down with Tim Beyers this week, wondering whether it's too late to buy Google. They decided that the search-engine star is a great company -- but one already worth $165 billion. With that kind of girth, the duo both believe it's unlikely to tack on substantial gains in the near future. I guess you can call Tim and Mac a pair of Boulder holders, but I'm feeling a little bolder than Boulder. I'd argue that, until proven mortal, it's never too late to buy Google.

Faster than its own horses
Did you hear about the stock that gets cheaper, the more expensive it gets? I know it sounds insane, but bear with me here. The second quarter has been good to Google. Over the past three months, shares of Google have gone from $467 to just more than $530. Market managers would kill for a 14% return over the course of an entire year. Google has nailed it in just three months.  

Now comes the kicker: Google is nearly as cheap today as it was a month ago.

Really.

Analyst estimates have climbed higher, helping to justify a good chunk of Google's heady appreciation. Investors who snapped up shares at $467 three months ago -- at 33 times this year's projections, and 25 times next year's bottom-line estimate -- aren't much different from those who paid $530 a share yesterday. Sure, the latter group is paying a little more (at P/E ratios of 35 and 28, respectively), but the company is also that much closer to higher estimates in the near term.

The art of raising estimates has been a perpetual sport, as befuddled analysts deal with a company that has blown away their collective profit targets in all but one quarter since going public.

Failure to hit a moving target may make Wall Street look dumb, but it sure makes investors going along for the ride look drop-dead gorgeous. This is more than evident if we shift our focus from the past few weeks to the past few years.

When Google went public in summer 2004, it had earned $0.41 a share on $961.9 million in net revenues in 2003. Last year? It earned $9.94 a share on $10.6 billion in net revenues.

In short, Google's shares may be trading 524% higher today than their $85 IPO price tag, but the previous year's net revenues and earnings have soared 1,002% and 2,324%, respectively.

Things get even more interesting when you apply the current -- and that term should always be used loosely with Google -- 2008 estimates of $19.26 a share in net income, on $15.2 billion in net revenues. Earnings will be up by 4,598%, yet bears still quibble over a 524% share price spurt -- one that may seem like a rounding error at this point?

A realistic optimist's guide to Google
I know. Google is a lot bulkier these days. The upside potential during the halcyon days of its debutante dance in 2004 may not feel as open-ended. Google has put on market-cap weight, not only in share price, but also in shares outstanding through secondary offerings, option grants, and acquisitions. (That's why I went with earnings per share growth, instead of the more generous spurt in net income.)

Google is an unlikely six-bagger over the next three years. However, since it's now trading at just 27.5 times next year's bottom-line projection -- with the high-margin online advertising market still in its infancy -- is Google really that overpriced?

Let's see how it stacks up against other companies that rely on online advertising to make a living.

Sure, Yahoo!'s share price is propped up by its stake in Yahoo! Japan and the fact that it is working off depressed profit levels. aQuantive is buoyed by a hefty buyout premium. MIVA is just starting to turn things around. All five are much smaller than Google, too. That may seem important, even though many of them are actually growing slower than Google.

So I'll go out and say it. It's not too late to buy Google. There may very well come a time to change my tune. The share price may roll past the fundamentals. The search landscape may shift. Neither scenario appears likely in the near term, so prematurely jumping on the S.S. Pessimism can sink your portfolio.

Way too many investors balked at the $85 IPO price, the $100 open, and the looming end of the lock-up period, after which some feared that insiders would bail in droves. Since then, Google's hit a string of share-price milestones that seem to get a lot more press than its similar top- and bottom-line accomplishments.

What's the deal, Sisyphus? Why push the boulder when you can roll with it?

For more Foolish Google coverage:

• Gold Rush at Google?
• Go, Go, Google Hybrid!
• It's a Small World, YouTube

Yahoo! is a Stock Advisor recommendation. CNET is a Rule Breakers selection. aQuantive is a former recommendation of the newsletter. Sign up today for a free 30-day trial subscription.  

Longtime Fool contributor Rick Munarriz doesn't own Google, but he would if he could. The Fool's trading guidelines have restrictions, and Rick just can't seem to stop talking about Google long enough to make it happen. He'll settle for admiring it from a distance. He does not own shares in any of the companies in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.