Thursday, October 16, 2008

Google - Time To Buy?

I have done fairly well betting against widely-held, high growth, overvalued stocks that everyone loves. Google has been one such candidate. I've been on the short side of Google a few times, and each time it has paid off. I last wrote about Google following their second quarter earnings release. That piece can be reviewed here. With revenue and click growth slowing, a rich valuation, excessive bullishness on the stock, and a slowing economy, my earlier shorts were relatively easy calls.

It's important, however, not to put the blinders on and end up "married" to a position or viewpoint. In keeping with that, the situation with Google is now very different than when I last shorted it. For starters, valuation looks much more reasonable. IF the estimate for 2009 proves accurate, then Google is trading at a 14 P/E. That's down from 20 at the end of last quarter and north of 30 at the beginning of the year. We no longer need ridiculous growth estimates to support Google's earnings multiple.

Also different are investor expectations heading into earnings season. For the first time ever, management admitted last quarter that they were feeling some impact from the economy. It's probably safe to assume that the company has been further impacted by the economy, and it should also be safe to assume that investors are expecting some further negative impact. It shouldn't come as a surprise to anyone. In other words, the rose-colored glasses should have come off following last quarter's conference call. We can see that earnings estimates have come down since then, and analysts are now looking for a flat quarter sequentially. With the stock off 55% from its highs and 37% since mid-year, some healthy degree of headwind is already baked into the stock.

Google will be reporting last quarter's numbers after the close today, and all eyes will be on a few key areas. Click growth, of course, is critical as is cost containment. In the past, management has shown little concern for its stock price or near-term earnings as they've ramped spending regardless of results. It'll be interesting to see if the slowing economy has encouraged management to ease up on spending. Also, the company has been trying to improve the quality of its search results and hopes to earn more from this improvement. We'll get more color on all of this and more at 4:30 p.m. today.

The bottom line is that Google is an interesting buy candidate at these levels. Valuation is reasonable, growth is likely to remain decent, cash flow generation is strong, the excessive optimism in the stock is gone, and they still don't face a serious competitive threat. The market's reaction to Google's earnings will hinge in part on which side of the bed traders got up on this morning, and any large move in the market will almost certainly carry GOOG along with it in the near-term. Regardless, GOOG is finally once again looking intriguing to own.

Disclosure: The Rubbernecker is now long Google stock (for the moment) but short Google's foray into energy and world domination.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.