After Google (GOOG) beat low expectations yesterday, most analysts rushed to recommend immediate purchase of the shares–just as they have every quarter since the stock peaked at $740. Almost all Google analysts are still bullish, and most price targets we’ve seen are still in the $475-$500 range. In our opinion, if Google gets back there in a year, it will only be because the broader stock market has soared.
Google’s quarter was impressive, especially in light of the global economic meltdown. But the central problems for the stock remain:
- Google is still a one-product company, and the product is coming to the end of its adoption cycle. For two years now, Google has been trying to develop the product that will pick up where search leaves off (the Office to Google’s search-business Windows). So far, it has failed. Mobile won’t do it. Video won’t do it. Display won’t do it (unless the company deigns to put display ads on its own site). Google may develop a big companion product eventually, but, as yet, it hasn’t. Bulls love to say “buy Google because it controls the search market.” Controlling markets doesn’t make stocks go up.
- Revenue growth is still decelerating rapidly. Net revenue growth decelerated from 46% in Q1 2008 to 25% in Q4. We see nothing that will change this trend as we proceed into 2009. We are also not aware of any big-cap tech stocks whose multiples have expanded sustainably amid revenue deceleration like this.
- 2009 estimates are still too high. Analysts have been cutting estimates for 2009, and they are likely to continue to do so. Consensus estimates for Q1 seem reasonable (a deceleration to 10%-20% year-over-year growth). But most analysts project that this deceleration will flatten in Q2 and Q3 and then begin to accelerate again in Q4. We have not seen a compelling explanation for why this is going to happen.
It is true that Google is finally showing some good expense discipline and that margins finally ticked up. It is also true that, with $50 a share of cash and $5 billion of annual free cash flow, the company is in robust health. But we challenge any analyst to show us a chart of a stock that has soared through margin expansion while revenue growth is decelerating rapidly year over year.
(Also, Google’s margins are already high. The company would be shortsighted to hike them up much farther. Higher margins would draw even more scrutiny and anger from regulators, who are already grumbling that Google controls too much of the advertising market).
At $310, GOOG is trading at about 14X 2009 estimated free cash flow of $6 billion (enterprise value). 14X is a reasonable multiple, but it’s certainly not a screamingly cheap multiple for a company of this size (For comparison, Apple is trading at less than 10X free cash flow). Until revenue begins to reaccelerate, we have a hard time seeing sustainable multiple expansion.
See Also: Google Stock After Q3: Dead Money
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