Published:
November 17, 2008
The word "google" has become
synonymous with surfing the Internet. But lately, every time I hear
it, I think of how cheap this company is to own right now. As the
global leader in online search, Google (NYSE: GOOG, $310.02)
provides a free website that allows users to search for specific
content across the world wide web. And while Google has been
considered a growth stock since its IPO, it's now trading at
historically low valuations, tempting even hardened value investors.
Most of the company's revenues come from advertising -- text
advertisements appear adjacent to search results when users look for
specific content. GOOG in turn gets a fee every time someone clicks
on one of these online advertisements.
Catalyst(s): Online advertising spending is growing
rapidly -- especially for search engines. The reason being that this
form of advertising offers more measurable and targeted results.
Google's system targets specific ads based on what users type into
their search box, geographic location and other factors. Their
sophisticated, proprietary systems for targeting advertisements are
continually improved to effectively deliver ads to users who are
most likely to click through to advertisers' websites.
With television or radio advertising, it's tough to target
advertisements to specific users. Even worse, it's tough to know how
effective that advertising has been in generating new customers --
there is no real way to accurately measure how many people respond
to a particular ad.
But online search advertising addresses these issues -- ads are
carefully targeted toward specific users, and it's simple to measure
how many users click on an ad and how many eventually make an order.
Better still, advertisers pay for an advertisement only when a user
clicks on it -- not each time it is viewed.
As a result of these advantages, corporate spending on search
advertisements is growing even as companies pare back on spending
elsewhere. This should help make search advertising far more
resilient in an economic downturn -- companies will likely continue
to increase their spending on more effective and targeted online
advertising.
My staff and I also see some of GOOG's newer services offering
potential growth catalysts even though search advertising is
currently close to 90% of revenues. For example, Google's YouTube
website has become an increasingly popular website for online video
delivery; given the website's traffic, it's likely to become an
increasingly popular site for advertisers as well.
Competitive Advantages: GOOG is far and away the
largest player in the search advertising business. GOOG's websites
are also among the busiest in the world. Consider that Google and
YouTube currently rank as numbers 2 and 3, respectively, in terms of
the world's highest-trafficked websites (Yahoo! (Nasdaq: YHOO) ranks
number one). It's estimated that close to a third of all Internet
users visit Google.com on any given day.
This traffic confers what is known as a network advantage for GOOG.
In other words, the more users a search website has, the more
valuable it is to advertisers because it offers better exposure to
potential customers. Given Google's huge and growing traffic,
advertising on its site is a natural choice for many and gives it a
huge advantage over any would-be startups.
Valuation and Outlook: GOOG trades at roughly 13 times
estimated 2009 earnings, its lowest valuation on that metric since
going public. With an estimated long-term growth rate of +22%, GOOG
currently trades at roughly 0.63 times its growth potential. That's
extraordinarily cheap for a market leader in a fast-growing industry
like online search.
In addition, Google has a solid financial position with no debt and
more than $14 billion in cash on the balance sheet. Over the past 12
months, it generated more than $7.4 billion in free cash flow,
equivalent to 7% of its market capitalization. With a leading market
position, plenty of cash to fund growth, and the lowest valuation
since its IPO, GOOG looks like a solid "Buy" candidate. Given its
valuation, we think this is a great time to add the shares.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy co-founded StreetAuthority.com and became the firm's
Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in
2006. Prior to that he spent several years as Managing Editor at a multi-million
dollar financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also responsible
for equity research and managing a team of seasoned professional financial
writers, researchers and market commentators.
Paul's previous experience includes a position at Robert W. Baird & Co.'s
full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
the U.S.
Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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