As many of you know, I’m a long-term believer in a few companies such as Facebook (FB) and Amazon (AMZN). One other company that I’ve often praised is Google (GOOG). I just think the long-term opportunities are incredibly vast. I always tend to look at valuations based off of factors such as the P/E ratio, growth in sales, and profits. For a company like Google, that only gives me part of the story, though. That is especially true since Larry Page has been back in charge of the Internet giant. Why? Because the company is back to being nimble, trying different things that may or may not pan out, etc.
It’s All About Big Data
In this era, it’s all about owning data and being able to connect different data points together. Google has mastered this for over a decade now, and I can’t think of anyone who could possibly catch up. As I’ve argued before, the only company to possibly compete with Google in that regard is Facebook — hence, the incredible rivalry between the two. I would argue that while some think Facebook could eventually lose its “mojo” and become the next MySpace, Google’s data advantage is much more sustainable. How so? Just think of Google Maps. If mobile is the new environment, then having advanced maps is critical. Google is so ahead of everyone else in that regard. It was able to leverage that when Apple (AAPL) tried (and failed) to go out on its own. Already, one of the major weaknesses of the new BlackBerry (BBRY) lineup is the absence of Google Maps (or a solid alternative).
When I hear critics say that Google is not making money from Android, I think they’re missing the point. It’s not about making money upfront. It’s about gathering data and offering services to those users.
Why Is Mapping Data so Critical?
It’s easy to overlook how important it is.
– It helps Google better understand where things are when users are searching for local businesses online.
– It helps provide the best GPS served through Google Maps.
That Leverage Is Only Going to Grow Bigger
Currently, Google continues to work on self-driving cars that have been logging thousands and thousands of miles and will certainly be part of our future. Can you imagine anyone else trying to work on this opportunity? Certainly not car companies!
Then, a few months ago, Co-Founder Sergey Brin was spotted on the New York subway wearing Google Glasses. What are those? It’s hard to say what they are and even more of a challenge to guess what they will become. If you could have glasses that gave you information about where you’re going, about your heartbeat, that were connected to your phone, that could access any data on your phone (email, GPS, Internet, etc.) — you can see some of what Google Glasses do here. I’m not saying it’s a billion-dollar business, but it might be. Apple’s secret “iWatch” project has recently been discovered by the New York Timesand Wall Street Journal, and it will certainly serve a growing market (currently occupied by smaller players such as Fitbit and Jawbone). But I believe Google has the upper hand here.
The Company is Undervalued Because of Innovative Prospects
This is an argument I will not delve too deeply into because it is not my nature to value based on abstract information. I do, however, believe the company is undervalued if it can follow through on some or all the innovative projects it has in its pipeline and monetize them. If Google Glass is popularly accepted and becomes a big money-maker along with a few other projects (known or unknown), then valuations based on Ad and Mobile revenues alone become understatements of the company’s true value. Entire new divisions would be created in the company and marketplace. When Apple (AAPL) innovated like that, the company was growing much faster than the 13.58% that analysts currently have Google down for.
The Company is Overvalued Because of Recent Price Movement
Many investors argue that Google is overvalued now simply because it was for sale much cheaper only a few months ago. Indeed last June, you could have purchased stock in Google significantly lower at $556 per share.
This does make sense. Yes, Google’s prospects have changed significantly since June but have they really gotten that much better that the stock deserves such an increase? Most likely not. The thinking is also that one cannot accept purchasing something now that he knows he could’ve purchased much cheaper in the past. And really if you think of what value is – what you receive per dollar spent, Google was a better value back then. You were getting the same stock for much less and many investors just can’t accept that. But then again Google (GOOG) is the company of the future with a strong management, innovation and as well a global company. The RSI (Relative strength indicator) is at a value of 73 indicating it has had quite the high volume during these two weeks, which again is reflected in the share-price on the chart above. We shall see a very minor pullback possibly opening possibilities too add more shares or buy-in.
Investing based on perspective in the sector
So what argument is correct? Well by now I’m sure you’ve figured out that all the views are internally valid. Google’s valuation is subjective as is any stock valuation.
If you are looking for absolute value and don’t wish to invest in Google’s competitors, then Google is fundamentally undervalued. Even on conservative estimates the stock still passes the test and that’s enough for many investors. Many investors also are excited about Google because of all the innovative hype surrounding the company. If what they are expecting occurs, they will certainly make a lot of money.
For other investors who consider relative value and the opportunity costs of not being able to invest in cheaper companies if they were to buy Google, Google seems quite expensive. Many investors cannot rationalize having their money anywhere but in the best value possible. Many investors also act as bargain hunters, only buying when they find things at their cheapest. For them, Google is unattractive because they could’ve got in months ago for much less.
This is what makes a market. Investors will always disagree on a company’s prospects and value. If we didn’t disagree, then there wouldn’t be a market because no one would buy what someone else was selling.
It’s also interesting to see how subjective a valuation, something most understand to be objective and solid, can actually be. Humans are stubborn. Once we decide whether to do something or not to, we will go to great lengths to back up why we made the right decision, even if we don’t truly believe it.
I believe this article is helpful for anyone considering investing in Google because it presents various perspectives. The best investors are aware not just of what they think, but also of what those around them think. Do your research and take some time to consider which view you support and why. Try to be as objective in your analysis as possible. Whatever you decide, good luck to you.
How much are all of these possible opportunities worth? Difficult to say — especially if you’re investing with a short- or medium-term horizon. I would argue, though, that investors with a 10- or 20-year horizon should consider such “ex” factors when trying to determine Google’s value. I personally think the upside is significant but very uncertain, given the fact that these (and others such as Google Fiber, Google Docs, etc.) have high potential but are very difficult to predict.
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