The market has a bearish view of Google
Since the beginning of the year, Google's stock has underperformed the S&P 500 by 23 percentage points, and large-cap tech peers Apple
Investors have reason for concern. Google ceded share to Baidu.com
Despite its size, Google is still growing. Not as fast as in years past, but with only one, maybe two, serious contenders in the search market, growth, even if tempered, should be reliable in the years ahead.
No less investing luminaries than Berkshire Hathaway's
With no debt and $26.5 billion of cash and marketable securities on its balance sheet, Google has plenty of resources to invest in mobile and cloud computing. While neither of these areas has become a meaningful business for Google yet, the company is gaining traction. Its Android mobile operating system has 28% share in the U.S., and the company reports 2 million businesses use Google Apps.
Meanwhile, Google's cash pile should continue to grow rapidly, even as the company invests for the future. The search engine is a highly efficient cash engine, converting nearly $0.36 of every revenue dollar into free cash flow, a higher rate than either Apple or Microsoft, which are hardly slouches when it comes to generating green.
Google's valuation is reasonable at 18.2 times trailing-12-month free cash flow and 15.8 times next year's earnings estimates. Examining the company on an enterprise value basis, Google looks even better at 13.2 times forward earnings estimates. If the economy and investor confidence swoon again, the stock should weather the storm better than others, as it did during the most recent economic crisis.
No one is saying Google is going to be a 10-bagger. With a market capitalization of $161 billion, that's almost impossible. But it's easy to imagine the stock returning 20%-plus over the next year with modest downside risk. It's worth a look, in this Fool's view.