Google surprised most people yesterday, delivering a solid, disciplined performance in the midst of a global economic meltdown. But the stock only rallied to where it was a week or two ago, and–barring a major stock market boom–it’s not likely to zoom higher from there.
Because most of the same problems that have beset Google’s stock for the past year are still in place:
- Decelerating revenue
- Maturing product cycle (search isn’t new anymore, and Google has 70%+ global share)
- No new products ready to pick up growth slack
- Deteriorating economy
Google did prove this quarter that it can manage its costs, which is a significant positive (and the reason the stock is $380 this morning and not $300). A sharp drop in capital expenditures was particularly encouraging and contributed to an amazing $1.7 billion of free cash flow. Alas, the company’s comments on the call made it sound as though the CAPEX decline was an anomaly, so investors can’t count on gigantic cash flow growth from here.
And then there’s the global economy. The first question on last night’s conference call was the best: What has the tone of business been in the last few weeks (anecdotal reports have seen search spending plummet)? Google didn’t answer this question, of course. It just had folksy Chief Economist Hal Varian muse about how nothing is clear. That’s probably an indication that the last few weeks have been OK, but it is inconceivable to think that Google will completely sidestep a global economic collapse. So the rest of Q4 is likely to be a white-knuckle affair.
At $380, on annualized Q3 free cash flow, Google is trading at a perfectly reasonable 15X cash flow. That’s a fine multiple for a company of this size and quality, and, finally, it should limit the stock’s downside. But unless you think that revenue will reaccelerate, the economy won’t affect Google, or CAPEX spending will continue to decline, it’s hard to see why the stock will charge immediately higher from here.
But here’s some good news: in the mid-$300s (or–even better–lower), at 15X cash flow, it should finally make a good long-term investment again.
See Also: Google: Strong Q3, Amazing Cash Flow
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