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Tickers in this Article: GOOG, TWX, IACI, CLWR, YHOO
After breaking the $600 per share barrier back in May 2007, less than three years after going public, Google (Nasdaq:GOOG) stock has fallen back to earth in sympathy with lack lustre fundamentals due to a struggling global economy. But has it fallen sufficiently to pique the interest of value-minded investors?

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Quarterly Recap
Google released results last week for fiscal 2008 ending December 31, that saw full year sales grow an impressive $21.8 billion (31.3%), though trends definitely slowed as 2008 wound down, as evidenced by the still-respectable 18.1% sales growth in the fourth quarter. Advertising revenue grew 28.7% and 15.7% for the year and quarter, respectively, to account for 97% of the total top line for both periods. Licensing and other revenues accounted for the rest and grew rapidly from a small initial base. (Learn how to use revenue and expenses, among other factors, to break down and analyze a company, check out Understanding The Income Statement.)

Net income actually fell for both periods on a one-time impairment charge related to Google's equity investments in archrival AOL and WiMax provider Clearwire Corp. (Nasdaq:CLWR), but ended up firmly in positive territory at $13.31 per diluted share for the full year. Yet operating cash flow improved an impressive $7.9 billion (36%), with free cash flow after subtracting out capital expenditure of $2.4 billion (62%) up a whopping $5.5 billion ($17.30 per share).

Market Environment
Sales growth is expected to slow considerably for the coming year and could even drop into the single digits, though analysts currently project it to pick up again in 2010. That implies profit expansion opportunities will remain limited as well, which isn't bad considering advertising spending is one of the first to be cut by companies in tougher economic times. Still, the migration of advertising to the internet at the expense of traditional print, television, and other avenues will continue to work to the advantage of Google and rivals, such as Time Warner's (NYSE:TWX) AOL, Yahoo! (Nasdaq:YHOO), and IAC/InterActiveCorp's (Nasdaq:IACI)

Google is picking up the lion's share of this growth. AOL recently announced job cuts as it works through a sales slowdown and speculation grows that it may be looking to combine forces in some form with the rest of the second-tier players like Yahoo!. And speaking of Yahoo!, its reported fourth quarter sales fell 1% as it grapples with a challenging external market, first losses since the last slowdown in 2002, sliding market share, and a new CEO.

Bottom Line
Google can be commended for its dominant share of the online search business and the revenue associated with targeted advertising. However, at 19-times trailing free cash flow, the shares are still too high for those seeking an investment bargain. Growth is still robust and may accelerate again along with a recovery in worldwide economies, but I am reminded that Yahoo! was the industry leader not that long ago; meaning technology changes can occur rapidly and can quickly alter the industry pecking order. In other words, Google may have fallen to earth, but it still hasn't fallen to the basement where its risk/reward potential is more favorably balanced.

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