Corporate earnings roll on, with U.S. stocks little changed on Friday. The Dow Jones Industrial Average (^DJI 0.52%) and the broader S&P 500 (^GSPC 1.03%) are down 0.40% and 0.13%, respectively, at 1 p.m. EDT on Thursday. But it's the Nasdaq Composite that continues to shine today, up 0.54%, with one of the technology-heavy index's most prominent names, Google Inc. (GOOG 1.38%) (GOOGL 1.50%), gaining 15.9% and setting a new all-time high, following yesterday's after-hours second-quarter earnings report.
In February 2014, Bloomberg ran a story with the headline "Google Briefly Tops Exxon as 2nd-Most Valuable U.S. Firm." At the time, both companies had a market value just above $395 billion. (Apple was at "only" $463 billion back then -- what a juggernaut!) With the fall in oil companies' fortunes, there is no more "briefly" about it, and Google is putting more distance between itself and the current No. 3, Microsoft, adding roughly $60 billion to its value today -- a stunning figure.
On Wednesday, I wrote that "businesses that are riding a long-term secular growth trend and have a competitive advantage -- which PayPal does thanks to the network effect -- have a habit of growing into their valuations quickly." I was discussing PayPal, but Google has provided a spectacular demonstration of that phenomenon.
Consider that when Google went public in August 2004, it ended its first day of trading valued at 76 time trailing earnings. At the time, it was impossible for this value investor to reconcile himself with that valuation. What an enormous mistake, in hindsight. Despite what appeared to be a nosebleed multiple, the shares have since gone on to increase nearly 14-fold in value, for a superb 27% annualized return spanning nearly 11 years.
Indeed, although the price-to-earnings multiple has roughly halved since its IPO -- it's now just under 35, according to data from Bloomberg -- earnings-per-share growth has more than compensated for this, outstripping the 27% annualized return cited above.
The secular growth trend Google is riding (which it essentially launched) is, of course, the shift from traditional advertising to much more superior targeted online ads. As far as competitive advantage goes, Berkshire Hathaway Vice Chairman Charlie Munger said of Google in 2009 "[it] has a huge new moat. In fact, I've probably never seen such a wide moat."
Naturally, these observations are easier to make with the benefit of hindsight, once the winners have been sorted out from the losers. There are literally fewer than a handful of companies like Google that emerge in a generation, and perhaps just one or two. Nevertheless, it's useful as an (extreme) example of the enormous value creation that is possible for a company that is able to earn and sustain a dominant position in a global growth market.
Netflix and PayPal are two companies that might very well fit that description. Investors bidding up their shares this week to lofty levels are making that very bet.
As far as Google is concerned, it could perhaps take a lesson from the only company that is more valuable than it is: Apple. With nearly $65 billion in net cash on its balance sheet, the search giant may want to consider implementing a dividend. In an ultra-low interest rate environment, even committed growth investors can appreciate the value of a cash return.
