Even if the efficient market hypothesis has severe drawbacks and deficiencies, it's still hard to imagine that the stock of a company as large and well-followed as Google (Nasdaq:GOOG) could be meaningfully undervalued. And yet, a long-term discounted cash flow analysis suggests that it's at least possible. While Motorola's operations will pressure margins and there's ample competition in search, mobile and online ads, Google still looks like a stock to consider in the tech space.

SEE: A Primer On Investing In The Tech Industry

Fourth Quarter Results Offer Plenty of Noise, but Growth too
Google's fourth-quarter results are not necessarily all that messy on a straight GAAP basis, but hardly any investors or analysts evaluate Google on its GAAP performance. Consequently, a lot of moving parts and adjustments muddy the waters a bit. That said, Google's results were largely good.

Gross revenue rose 36% from last year and 2% from the prior quarter. On a stand-alone basis, Google's "core" net revenue rose 21% (or 24% in constant currency), while Motorola revenue fell 56% and missed sell-side estimates by about 25%. Paid clicks increased 24%, while cost per click declined 6% (better than recent trends of high-single-digit to mid-teen declines).

Margins were considerably murkier, but it does look like the mixed shift in revenue is pushing margins lower. There are seemingly as many ways to adjust Google's reported earnings as there are analysts doing the adjustments. With my adjustments, operating income increased by about 6%, with a greater than six-point decline in operating margin. A larger contribution from lower-margin businesses such as YouTube, Motorola and Google Play are largely responsible for the shift.

SEE: How Does Google Make Its Money?

Mobile Still a Big Unknown
It doesn't seem to matter whether you talk about Google, Facebook (Nasdaq:FB), Pandora Media (NYSE:P), Groupon (Nasdaq:GRPN), Microsoft (Nasdaq:MSFT) or even Amazon.com (Nasdaq:AMZN) - mobile is the reigning obsession with analysts and investors today.

To that end, Google appears to be doing well in terms of clicks, search share and so on, but the quarter-to-quarter financial results are volatile and likely to remain so for the near future. Some of this volatility comes from the traffic acquisition costs. In mobile, Google often finds itself in the position of having to pay Apple (Nasdaq:AAPL) or other Android partners for distribution. At the same time, companies such as Apple and Facebook are trying hard to keep/control more and more of their own users and keep Google on the sidelines.

Management Still Has Some Work to Do
I would argue that Google still needs to work on presenting a unified vision of how its parts fit together and build long-term value for shareholders. Granted, Google seems to have a leg up on Facebook. At least Google doesn't seem to make decisions by over-reaching for revenue and then backtracking when users howl in outrage. But many investors are still skeptical about the move to acquire a smartphone business and are uncertain how much margin erosion Google will accept to establish these ancillary businesses.

The issue of the share classes also continues to fester. Launching a third class of shares (C shares) doesn't add any value in my mind. Investors have good reason to begrudge a management team that makes debatable strategic moves (like spending billions on Motorola Mobility) and then shields itself with special voting classes of shares. That said, it's not as though management doesn't have a sizable economic stake in the future of this business. So while they're in a different class of cabins, they are at least on the same boat as common shareholders.

SEE: 5 Surprising Companies Google Owns

The Bottom Line
Google is one of those companies/stocks where the potential value adds up at such a rate that it seems prudent to take a second, third and fourth look at the underlying assumptions. For instance, if Google grows revenue at a long-term rate of 9% - a rate that seems pretty reasonable given the ongoing growth in paid search, online advertising and smartphone adoption - and improves free cash flow margins by about 16% (leading to long-term free cash flow growth of 11%), the fair value seems to be well ahead of today's price.

Even if Google can't improve its free cash flow margins at all, the valuation does not seem demanding - holding free cash flow margins steady and assuming that same 9% or so of growth points to a fair value into the $900s. Clearly, then, it would seem that the market expects ventures such as Motorola Mobility and/or competition in mobile to be seriously bad news for ongoing free cash flow generation. I won't dismiss this threat out of hand, but if you believe Google can continue to grow at a rate of at least the mid-to-high single digits, these shares are still worth considering today.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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