Billionaire hedge fund manager Leon Cooperman, the founder of $US10 billion Omega Advisors, is super bullish on Google and its new CFO.
The 72-year-old investor said in his fund’s second-quarter letter that he snapped up a position in the tech giant in mid-April.
He bought in when Google was trading at $US602 per share. They’re currently trading above $US655, which represents a return of almost 9% in a little over three months.
One of the main appeals of Google is the new CFO, Ruth Porat, according to Cooperman.
Porat, who was widely regarded as the most powerful woman on Wall Street in her previous role as CFO of Morgan Stanley, joined Google back in March.
She made a great impression on a lot of Wall Street analyst during her first Google’s quarterly earnings call this month. One wrote that her hire felt like “the dawn of a new era” for the company.
Cooperman described her debut as a “tectonic shift” for the way Google treats shareholders in his July letter to investors.
Here is Cooperman (emphasis ours):
In mid-April, we initiated a position in GOOGL on the belief that the business was not being fully appreciated by the market. At the time, GOOGL and the S&P 500 were trading at the same 16x P/E multiple. However, GOOGL had superior fundamentals on just about every financial metric versus the S&P — Revenue Growth, EBITDA Margin, Cash Flow and Earnings.
GOOGL shares were trading at a discount because of several perceptions that had gained a following in the market such as search was dying because of mobile applications, competition from Facebook, poor capital allocation and management turnover. While we acknowledge that consumers are in fact spending more time in applications, our belief is that Search is still relevant in the mobile world and that the incoming CFO, Ruth Porat, can take a more shareholder-friendly approach to OpEx and CapEx.
The company reported earnings on July 16th and showed a strong EPS beat vs. consensus numbers. The company announced it now has more than 1 billion users across Google Search, YouTube, Android, Chrome and Google Maps. Additionally, the strong performance in the company was driven by core Search — especially on mobile — and YouTube. Lastly, Ruth Porat made her debut on the earnings call and presented what we consider a tectonic shift for the way GOOGL treats shareholders. She made it clear that proper resource allocation stretches across OpEx and CapEx and that the company is going to be focused on making efficient and effective investments across the board. Additionally, Ruth said that her focus is on maximizing shareholder value over the medium and long-term and debt could theoretically be a part of that equation. GOOGL currently has ~$US65bn in net cash of which ~$US40bn is overseas.
While the stock has moved in our favour since initiating the position, we continue to be excited about the new approach to cost controls that GOOGL is rolling out across their organisation. Cost controls coupled with a healthy core business should lead to margin expansion, revenue re-acceleration and more earnings beats. When we initiated the position we had modelled $US35 in 2016 EPS at 20x for a price target of $US705. Given the new disclosure, solid performance and message from the company, we raised our 2016 EPS estimate post earnings to $US36 and upped our multiple to 22x given the shareholder friendly approach to arrive at an $US800 price target. With the new cost controls in place we believe it is very possible to see GOOGL grow EPS north of 20% in the coming years which we feel should provide a sustained bid for the shares. Increasing leverage, share buybacks, tax repatriation and other one-off events represent additional upside to our price target. As we head into the second half of the year, we continue to believe that GOOGL shares represent an attractive risk reward.
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