At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
In a bullish research note yesterday, Nomura was practically drooling over the prospects for profit at Google. The company that owns "6% of the global advertising market" today is likely to near-double its market share over the next five years. Google's core business in Internet search will do even better, capturing "nearly 80% of the market, or $66 bn in total search revenue by 2016."
What about Baidu?
Now, this is not to say there are no threats to Google. Over in China, for example, there's this little company called Baidu
After all, 1.3 billion is just a hair under 20% of the globe's 7 billion-person population. And if I'm reading these numbers right, what this means is that Nomura doesn't see Baidu ever expanding significantly beyond Chinese borders to challenge Google internationally. (Which stands to reason. I mean, if you've got a choice between one search engine that gives you the world on a platter, and a second known best for helping maintain the Great Firewall of China, which service would you patronize?)
Granted, this still leaves Microsoft
As it turns out, the only company that Nomura believes can give Google a real run for its money is Facebook: "The biggest threat to Google is a strong social network offering an effective search product." However: "that threat hasn't arrived." (Although its IPO is just around the corner.)
Android army on the march
Nomura isn't alone in its enthusiasm for Google. In fact, at the same time as it was publishing its research, comScore issued its latest update on trends in U.S. mobile phone use. Turns out, while rival Apple
So a bit like Charlie Sheen, Google appears to be "winning" on all fronts. But what's the price of this success, and should we pay it? With $9.7 billion in trailing earnings, Google shares sell for 20.5 times annual profits today. That's only a bit ahead of consensus estimates of 18.2% long-term profits growth at the company, suggesting that at worst, Google shares are modestly overpriced.
In fact, though, you can argue that Google is a whole lot cheaper than it looks. Back out Google's $37 billion in net cash, and value the company on the free cash flows it produces (which are 14% richer than its reported earnings suggest), and the enterprise value-to-free cash flow ratio on this stock drops all the way down to 14.4.
So what's the upshot of all these numbers? A quick back-of-the-envelope scribbling suggests that Google is today selling for about 21% less than its true worth. And if you reverse that calculation, this suggests that the "correct" price on the stock is roughly $730 a share -- within a whisker of the $750 price target that Nomura just set for Google. Long story short, I believe the analyst is right on the money with this one.
Post-earnings, and post-earnings-sell-off, Google is finally buyable again. And right now, this instant, I'm going to back up those words by heading over to Motley Fool CAPS to rate this stock an "outperform." Think I'm wrong? Follow along.
By the way -- you don't have to own Google to profit from its success. Read our new report and we'll tell you about three other Hidden Winners of the iPhone, iPad, and Android Revolution. The report is free -- but for a limited time only. Click quick.