Google Cracks $1,000, Buy On A Pullback

By Jonathan Berr | October 18, 2013 AAA

Shares of Google (Nasdaq:GOOG), which not long ago was in Wall Street’s doghouse, cracked the $1,000 level after the search engine giant posted quarterly results that were far better than the most optimistic of analysts’ expectations.

Net income surged 36% to $2.97 billion, or $8.75 per share, compared with $2.96 billion, or $6.53 per share, a year earlier. Revenue at the Mountain View, Calif. company surged 12% to $14.89 billion. Excluding one-time items, profit was $10.74 and revenue excluding fees Google pays partners was $11.92 billion. On that basis, Google was expected to earn $11.62 billion, according to Bloomberg News. It was the company’s best profit growth in more than a year.

The stock closed Friday's session at $1011.41, an increase of 13.80%. Google now has a market capitalization of $337 billion, the third largest among publicly traded companies behind Apple (Nasdaq:AAPL) ($462 billion) and Exxon Mobil (NYSE:XOM) ($385 billion). Friday’s action added some $40 billion in market capitalization to Google, which exceeds the entire market capitalization of Yahoo! (Nasdaq:YHOO), which as of Friday stood at $34 billion.

“The results clearly demonstrate that Google remains the best of breed, best of class in the online advertising space, really within the Internet space itself,” Victor Anthony, an analyst at Topeka Capital Markets told Bloomberg News.

Google countered the naysayers who had expressed concerns about the company’s declining advertising rates by offering a new format that expands the reach of advertisers to mobile devices. In addition, Android devices continue to be popular. CEO Larry Page noted that 1.5 million smartphones using Google’s free operating system are activated each day.

Paid clicks on ads served by Google sites and those served by the members of its network rose 8% on a year-over-year basis and jumped 26% from the second quarter. Meanwhile, average cost-per-click fell 8% over the third quarter of 2012 and 4% over the second quarter. Revenue on Google sites jumped 22% on a year-over-year basis, better than the 18% gain in the previous quarter.

Motorola Mobile, the smartphone maker acquired by Google for $13 billion in 2012, continues to be a drag on earnings. The business posted an operating loss of $248 million in the quarter, higher than the $192 million loss a year earlier. Revenue plummeted 34% to $1.18 billion. Google unveiled the Moto X in August in order to reverse years of market share declines.

Even with today’s run-up, Google is not a terribly expensive stock. Its price to-earnings multiple is about 25, well under its 5-year high of 30 based on current earnings. When calculated using this year’s earnings, Google’s multiple is 22.9, higher than Apple’s 12.9 and Facebook’s (Nasdaq:FB) 74 level.

Wall Street thinks Google’s stock has room to run. Many analysts raised their price targets. Deutsche Bank thinks it may hit $1,220, ahead of Credit Suisse’s $1,200 target and Jefferies’ $1,150 forecast. Even with today’s run-up, Google has gained 42% over the past 12 months, lagging Facebook and Yahoo, which have both more than doubled.

The Bottom Line

Google is not a stock for the faint of the heart. It has been volatile in the past and will continue to be so in the future. For people with high tolerance for risk, this is a good stock. Wall Street has continually underestimated its potential for growth. There doesn’t appear to be anything on the horizon that could potentially slow it down. However, investors should wait for a pullback before pulling the trigger.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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