Back in August, I wrote a column suggesting that you buy Google (GOOG) at around $850. Looking back with 20/20 hindsight, that looks like a fairly obvious call, but at the time there were questions about the stock. Google had missed on Q2 earnings, with the important ‘cost per click’ (CPC) declining and the Motorola Mobility acquisition beginning to look like an albatross around the company’s neck. On the day the piece was posted, GOOG was in its sixth straight day of declines.
My point was that they had missed in Q2, but had really just fallen short of inflated expectations. Sure enough, some forecasts were adjusted back to reality over the next few months and, lo and behold, GOOG beat those expectations last week.
If the reaction to Q2 numbers was overly pessimistic, then it would be easy to conclude that the jump up above $1000 that followed the Q3 release was also overdone. In the short term it may have been, but if anybody took my advice and bought the stock back in August, they may be best served by riding out the probable correction.
It is tempting to look at a chart like this and say “sell now, while you can!” especially for a natural contrarian such as myself. When a stock pops over 10% and in doing so breaks a significant psychological level (in this case $1000), then a test back through that level over the next few days is almost inevitable. I am sure that many people had bought GOOG with a target in their head of around $1000 and while a sudden break probably gave them pause, as soon as the stock corrects somewhat and the level is approached again the fear of missing the opportunity takes over. I fully expect traders to squeeze some of these nervous longs out over the next couple of days, but the correction should be limited.
Look again at the chart above. You can see that before last week’s jump, a solid resistance had been formed in the $920-930 range. With the price gapping past that level, it will now form an obvious support. Buyers will probably emerge just above that range, so any correction could be short-lived.
Price support aside, I believe Google is still a buy. There are, however, certainly questions that can be raised about the Q3 results.
CPC declined again and despite encouraging words about Moto X, no specific numbers were released. The optimism about the new phone seemed questionable in the light of losses at Motorola growing 24% Year on Year to $248 Million. More worrying to many, given the “post Jobs” Apple (AAPL) story, was that CEO Larry Page didn’t sound well and said he would no longer be on earnings calls. So… why the optimism?
Firstly, despite the seemingly sky high price, a strong case can be made that GOOG is actually quite cheap. Analysts’ estimates of Google’s growth next year average 18.1% against expectations of average growth of over 30% in the tech sector generally, so they certainly don’t look excessive. Even with this understandable caution, forward P/E looks remarkably restrained at just over 20. As we saw last week, at those levels, any beat of expectations will have a positive effect on the stock, even if some bad news lurks.
Of course, in order for that to happen, some of those lurking problems need to be addressed. Here it comes down to the market’s opinion of the company. Traders have learned that you doubt Google’s ability to make money at your peril. In their early days, the very idea of making good money from a search engine that is free to the consumer was questioned.
Right now, it is the ability to generate advertising revenue from mobile platforms that is the challenge. I am not sure that GOOG will be the first to solve this problem, but somebody will, and when they do estimates of 16% revenue growth for 2014 will begin to look silly.
The Motorola issue could also become a moot point in the coming months. Until now, Google has avoided upsetting their collaborators in hardware by keeping the Motorola brand apart from their main operations and branding, but if losses continue to mount it wouldn’t be a surprise if that changed. Building their own devices under the Nexus, or even Google brand could easily change conventional wisdom as to the value of the Motorola Mobility deal.
So, there are technical and fundamental reasons to believe that GOOG can continue to appreciate, but most of all there is the perception of the company. Like AAPL a couple of years ago, GOOG is seen by many as a huge innovative force. Google Glass may be far away from commercially viable, but projects such as this, Chromecast and the driverless car research suggest that the risk appetite and entrepreneurial spirit at the company is alive and well, in spite of their size. This bodes well for the “Post-Page” era when it comes.
If you own GOOG the temptation to take a profit above $1000 will be strong. Just the law of large numbers makes it seem that continued appreciation from here will be difficult. A look at the underlying influences, both technical and fundamental however, leads one inexorably to the conclusion that the great growth story could yet have some way to run. Hold on to your Google!