THE GOOGLE INVESTOR: Stop Hoarding Cash And Give It To Your Investors

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Money Black Hole

GOOG Up As Market Slips
Stocks are up as Goldman Sachs and IBM miss investor expectations and ignite fears of a double-dip recession. While economic worries reign, catalysts for GOOG include continued Android and mobile traction; the release of Chrome operating system this fall; regained momentum in China; as well as progress in other newer initiatives (social networking, gaming, etc.). The stock trades at approximately 17x 2010 EPS and 12x Enterprise Value / EBIT, inexpensive relative to historical trading levels and the broader Internet group.

You Have $30 Billion In Cash; Do Something Useful With It Already!
The critics weigh in:

  • Google is avoiding the popular convention of returning money to its shareholders. Does the company really need $30 billion? Grow up and pay up. (The Motley Fool)
  • Dividends are a sign of strength and stability. Google should strongly consider following in the path of Starbucks. It can comfortably pay out 25% of its earnings in the form of a dividend. (Forbes)
  • Benchmark analyst contends Google’s second quarter EPS growth rate could have been several percentage points higher if the company had managed its cash more efficiently, and used some of it to reduce share count. (Barron’s)
  • Google could keep purchasing companies. The latest, Metaweb, to boost search offerings, is valued at under $100 million. With $30 billion on the balance sheet, that’s a lot of acquisitions. (TechCrunch)

Nexus One Officially Bites The Dust (The Wall Street Journal)
The Nexus One store, Google’s gamble to distribute its smartphone platform and disrupt the mobile supply chain, will soon be discontinued in the U.S. Investors who dumped the stock, shorted the stock or bought puts not long after the Nexus One launched, when the stock around $700, have prospered. The failure was largely due to the fact that only T-mobile would subsidise it and the AT&T version was $600.

Google Reported Superior Earnings And Investors Dropped The Stock Like A Bad Habit (BNet)
Google missed its net income estimates for the second quarter taking down the market, as investors fear a double-dip recession. Google made “only” $1.8 billion in net income, a 24% increase from the previous year. This seems like madness. How is a double-digit growth a harbinger of doom argues Jim Edwards at CBS News? If Google were any other advertising company “there would be a ticker-tape parade down Wall Street.”

It Costs A Lot To Be Google And To Find Another Cash Cow Business (Investopedia)
Second quarter margins contracted as Google continues to invest in the next growth engine and future of the business. But less profitability means less shareholder value, in the near-term at least. Unless investors see Google’s cash flow yield falling off a cliff, it does not take more than high single-digit growth assumptions to yield an investable margin of safety with GOOG stock.

Given Traction In New Business, Google Shares Estimated To Skyrocket (Barron’s)
Google shares could rise 35% given its Android search engine, YouTube and strong brand, according to a Barron’s article over the weekend. Google’s valuation is at a six-year low, below that of Apple and Yahoo. Analysts’ consensus price-target for the stock is $629 per share, or nearly 35% higher than the current trading levels.

Google Gearing Up To Regain Control In China But Will Take Time (Financial Times)
Tech firm iResearch shows the Chinese search market grew 53% in the second quarter. Google lost a chunk of market share to Baidu due to the censorship fallout. While there is still plenty of room for a piece of the pie now that Google is back on the mainland, the company is likely gearing up to regain its footing. But it’s going to take time to reverse the damage.

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