(By Michael Vodicka) Technology is a segment of the market that is traditionally known for two things; high growth and high valuation. The hottest sectors and stocks rarely trade at a discount to the market as investors bid up prices in anticipation of future earnings. So when a leader in technology falls to a historically low valuation while still pumping out huge growth numbers, everyone should take notice. And that is exactly what is happening with Google, Inc. (GOOG) right now.
2012 hasn't been particularly kind to Google, with shares currently down close to 15% on the year for a sharp under-performance to the S&P 500's 4% gain. But that bearish movement belies a company that is the undisputed leader in online search with an impressive portfolio of products that includes its web browser Chrome, online video-share site YouTube and its market leading mobile-device platform Android. The sum of these forces was on display in early April after the company reported another great quarter that handily beat expectations.
Excellent Q1 Results
Revenue for the period was up 24% from last year to $10.65 billion. Earnings of $8.75 per shares were 6% ahead of the analyst estimates, where in spite of a 9% earnings miss last quarter, the company has an average earnings surprise of 5% over the last four quarters.
But looking forward, there are still plenty of reasons to be bullish on one of the world's leading technology companies.
Reason to be Bullish
Google continues to see solid international growth, with sales of $5.77 billion comprising 54% of the company's total revenue profile, led by Western European countries like France, Germany and the U.K. Asia was also a strong point, led by outsized gains in Japan
But don't think that Google's revenue gains have come at the expense of inflated costs and margin compression, because it hasn't. The company looked strong in a number of key categories related to its search business, with average Cost-Per Click down 12% from last quarter and 6% from last year. Google also scored well in another very key performance metric for search engines, with its Traffic Acquisition Cost (TAC) holding steady from last year at 25%. Other operating expenses did increase as Google's labor force grew, but that also provides the foundation for future projects and additional growth
Google is also positioning itself to be a leader in mobile devices, with its Android operating system enjoying leading market share in the smart phone space while setting the foundation for the company to offer additional services and collect more revenue from search. Google slapped down a huge bet in the space last year when it bought Motorola Mobility for $13 billion, an initiative to create synergies between its software and hardware platforms.
In terms of financials, there is hardly a better company in the world, with Google's cash position climbing to $49 billion in its latest quarter against no long-term debt. This will give the company plenty of flexibility to pursuit new opportunities and acquire competitors and leading technology.
Estimates and Valuation
When you add it all together, analysts have been encouraged, pushing the full-year 2012 estimate up a little more than 2% in the last two months to $37.50, a bullish growth projection of 26% from last year. Longer term, the full-year 2013 estimate is pegged at $44.48, another very solid growth projection of 19%.
Here is the key to the entire conversation. That bullish movement in estimates has pushed Google's share price to a historically low valuation, with a PEG ratio of .77X well below the 8-yr. median of 1.02X and much closer to the all-time low of .55X than the all-time high of 2.29X.
The Chart
On the chart, 2012 has been a tough year for Google, with shares currently down about 15% compared to the S%P 500's 4% gain. A lot of that weakness came on the company's Q1 earnings miss from January when shares fell close to 10% in one session, but since then Google has struggled to regain its swagger. That has shares trading with an unusually low valuation for a company that continues to post impressive growth with a leading position in its space. Google won't see the kind of revenue or earnings gains it saw early in its career, now valued at $182 billion, but this is still a leader in its space and technology in general trading at the low end of historical valuation. Take a look at the chart below.
Google, Inc. (GOOG) vs. S%P 500-2012
**My clients own shares of Google**