According to a report from the Wall Street Journal, "" Google is entering its second decade as a public company with a historically high valuation following a big run, and as many investors are worried a wide range of tech stocks have detached from reality. IT shouldn't be tarred with the same brush and, even at this level, the stock still presents an opportunity''.
For starters, while at historic highs, Google's multiple is far below many Internet peers. And growth has legs in its core advertising business, which accounts for about 85% of total revenue. Plus, Google's current price arguably hands investors an inexpensive option on developments in home automation, wearable computing and self-driving cars. These are areas in which Google has laid what Mr. Page once described in a letter to prospective shareholders as "major bets on promising new opportunities" that could take years to pay off.
Affordability is not an issue for a company with $56.5 billion in cash and operations that generate more than $5 billion in cash per quarter. In any case, Google investors would be wiser to note the growth opportunities in the core advertising business.
Google still accounts for about two-thirds of Internet search activity in the U.S., according to comScore, and advertisers are continuing to shift more money to the Internet. Nomura estimates that the paid-search market will grow by 30% over the next two years.
Google is also bringing out new tools that include "enhanced campaigns" allowing advertisers to make cross-platform buys for desktop computer users and mobile devices. Another is product-listing ads that allow merchants to place shopping links directly into Google's searches. Analysts believe this will help boost fourth-quarter results due Jan. 30, thanks to strong online spending over the holidays.
More Web traffic is moving to mobile devices. Those can offer greater ad volume, although the effect of this is offset by weaker pricing. The latter should improve over time, and Google's ownership of the Android operating system gives it the largest mobile platform, which can help drive traffic and usage to its other services, such as maps and video.
On video, Google's YouTube business is still under-used as an advertising platform, leaving it with significant growth potential as more users see the service as a television alternative. UBS estimates YouTube pulled in about $4.7 billion in gross revenue in 2013 while accounting for just 9.3% of Google's total advertising revenue. The bank sees this share growing to more than 16% by 2017.
Having just capped a 12-month run that added more than 60% to its market value, Google is now trading at about 22 times forward earnings—its highest valuation in four years, according to FactSet. That is still at a sharp discount to other big Internet peers such as Amazon and Facebook.
And with a decade under its belt as a public company, Google has an established track record. Revenue has surged nearly 40-fold over the past 10 years. And Google's growth outlook remains strong, with Wall Street predicting 35% revenue growth and 44% earnings growth over the next two years.
