Google For Growth?

By Greg Sushinsky | September 10, 2010 AAA

Google (Nasdaq:GOOG) stock recently traded at around $465 a share, 26% off from its 52-week high. Potential investors want to know if the stock is worth buying. With its earnings growth rate slowed from its high-flying years, investors also want to know, is Google a growth stock anymore?

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Spectacular Growth
Prior to going public, Google's earnings growth rate in 2002 was 1,733%. This was followed by a couple of more mundane performances of just 138% and 92% annual earnings growth rates. While there is no consensus as to precisely what a growth stock is or when growth rates are sleepy enough for a company to be considered a value stock - and there is more to consider than simply the earnings growth rate - a common figure would be 10 to 15% annual growth for a growth stock. Google certainly qualified under any measure.

Slowing Growth
Google's growth has of course slowed, even since its early days as a public company, though it still produced a nearly torrid average annual growth rate of 40%. Lately, it has produced roughly 20% growth and is expected to grow even more slowly in the near future.

More Than Just Numbers
A list of factors which could be invoked against investing in Google include some fundamental business concerns. The company is being sued an awful lot, and successfully. Recently, a German court ruled Google is liable for copyright infringement for videos uploaded by YouTube users. There is a long list of lawsuits ongoing against Google, most notably Paul Allen's inclusion of Google in his wide-ranging internet patent infringement lawsuit. While some observers may yawn and regard lawsuits as nuisances, the necessary cost of a giant corporation doing business, these should be taken seriously as it's never clear how such legal battles or their ramifications will emerge.

Google's Business Future
That said about lawsuits, there are always risks to digest when considering an investment. What may be more important is to see where Google is going with its business. The value investor camp would point out that Google is still expected to grow at roughly a 15% annual rate, has $30 billion in cash on hand and carries no debt. It has significant products, such as Android, which are expected to continue to spread into the digital mobile world, and it is still the dominant internet search giant. Critics would claim that for all Google's success, it's pretty much a one-dimensional search business, without breakthrough business developments that are going to excite the bottom line in a major way.

Tech Future
Remember when Yahoo (Nasdaq:YHOO) and AOL (NYSE:AOL) were the big things on the internet? Remember their dominance? Their diminished and altered roles emphatically show the rapidly changing business conditions on the internet and tech in general. Fast growing companies, such as Google, Netflix (Nasdaq:NFLX) and Amazon (Nasdaq:AMZN), which have sustained high-growth rates for even a couple of years, are marked by dominance and innovation. This innovation in either products, delivery or service creates heavy customer demand which ends up robustly on the bottom line. Can Google recapture that kind of earnings momentum?

Can Google Still Grow Quickly?
A growth rate of 1,700%, as in its early years, is out of the question. A growth rate of 115%, like that of Chinese internet search competitor Baidu (Nasdaq:BIDU) is also unlikely. Predicting specific developments in tech and on the internet or digital or in mobile is close to impossible, yet Google is not standing still. Beyond Android, the company is developing approaches for the what may be the next cultural tech shift with Google TV. Management has historically kept the company moving forward, no small thing. Massive growth is not assured, yet Google remains savvy. Investors need to watch the business developments carefully. Meanwhile, with its underlying fundamentals, buying Google as a value stock at a bargain price isn't a bad way to invest. If there is a resurgence in the earnings growth rate later, that can be a bonus - a huge one. (To learn more, see Stock Picking Strategies: GARP Investing.)

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