In the technology sector, even the best companies can stumble.
recently took a hit from subpar quarterly results, largely due to a
hiccup in iPhone sales ahead of the launch of a an upgraded phone.
saw a commensurate beatdown after spending more money than Wall
Street would've liked. Yet the third musketeer of this group,
, saw no need for excuses. Third quarter sales of $97 billion came
in a hefty $300 million ahead of forecasts. And the search giant
earned $9.72 a share -- roughly $1 a share more than analysts had
been expecting -- for the second straight quarter. Shares have
risen nearly 20% since the beginning of the month.
But with the stock trading near $600, it could have more room to
move. Many analysts have price targets between $650 and $700, and
analysts at UBS have a street-high $800
. Let's take a look at why they're so
Up, up, and away...
For UBS' Brian Pitz and Brian Fitzgerald, Google remains a robust
growth story. They note that third-quarter sales growth of 33% (on
a year-over-year basis) marks the fourth straight quarter of
accelerating growth. Better still, growth isn't being fueled just
by core search-based revenue, but instead from Google's heavy bets
on mobile advertising and display ads.
In fact, Google's Mobile division is growing at a 150% clip and now
represents $2.5 billion in revenue on an annualized basis. Google's
Android now powers 45% of all smartphones, with 190 million phones
in circulation worldwide. "We see Android growing gangbusters, and
we don't see anything that's going to stop that,"
Larry Page said during a conferencecall with analysts. The numbers
don't lie: on average, 350,000 new Android phones were sold
every day in the first quarter of 2011. In the third quarter, this
figure hit 750,000.
So you can understand why Google went out and bought Motorola
Mobility earlier this year. Having better control of the entire
mobile ecosystem will enable Google to
on every mobile strategy it chooses to pursue, regardless of
whether other handset vendors provide support. (In fact, a
feature-rich Motorola phone would likely compel rivals to offer all
of the comparable features.)
Google's Display division, which has doubled in size from a year
ago, has become a key platform for advertisers. The unit, which now
works with ever-bigger clients such as
, snagged $600 million worth of new business in the past six months
Perhaps one of the least discussed merits of Google's growth
relates to international expansion. In the most recent quarter,
international search revenue grew at a 47% year-over-year pace,
twice the rate seen in the United States. The company is making
notable headway in Japan, Australia, Brazil and India.
Throwing spaghetti to the wall
The real charm of this business is that management shows no
hesitation to keep launching new initiatives to extend its reach
into new categories. Not all of them work out. Some, such as Google
Buzz (a Twitter-like product) and Google Labs (an R&D-oriented
division) have recently been shuttered. Meanwhile, other nascent
projects may eventually grow to be a significant revenue driver.
Google+, an effort aimed at the Facebook audience, already has more
than 40 million registered users. This chart,
which can be
on the tech blog of Familylink.com founder Paul Allen, shows how
quickly the service has gained traction.
UBS' analysts have run the numbers and figure the stock is just
too cheap at 10 times projected 2012 profits (when Google's $40
billion in net cash is excluded). To arrive at their $800 price
target, which is roughly 33% above current levels, they use a
model. They calculate the net
of future cash flow at $223 billion, add in the current $40 billion
in cash, apply a 12% weighted
cost of capital
and assume a 3.5% long-term cash flow growth rate.
Risks to Consider:
Google's impressive momentum derives largely from the company's
ability to remain two steps ahead of the rest of the field. Yet in
the technology industry, smaller, more nimble players sometimes
make the boldest breakthroughs. (Hello Twitter? Hello Facebook?)
Google will never derive the long-term cumulative cash flow UBS
anticipates if new business models emerge that steal some thunder
in terms of search, mobile advertising and other hot
Analysts at Merrill Lynch, who have a $720 price target, still
wonder if the Motorola deal will weigh on the stock : "We think
there will be continued uncertainty on what Google will do with the
hardware business and how the
will impact Google's valuation multiple."
Action to Take -->
Balanced against those risks is Google's ability to simply
replicate what works elsewhere on the web. Google+ is shaping up to
be a formidable rival to Facebook, and you can count on management
to closely monitor other emerging industry trends upon which to
Other analysts who follow Google don't hold the same level of ardor
for the stock, with price targets generally ranging from $640 to
$750, yet all appear to agree that Google's recent quarterly
momentum is likely to extend into the all-important holiday season.
This looks like a nice short-term trade opportunity, though if
shares move up to and past the $700 mark as the holiday season
approaches, profit-taking may prove wise, despite UBS' even loftier
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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