logo
  Join        Login             Stock Quote

Google Climbs CPC “Wall Of Worry”, But Less Attractive For Value Investors

 February 12, 2013 02:37 PM
 


() Search giant Google, Inc. (NASDAQ: GOOG) has climbed a major "wall of worry" over declining cost-per-clicks (CPC). At the same time, it is becoming less attractive to value investors due to its higher P/E multiple and lack of shareholder returns.

Let's dig in to the CPC part first. Google's revenue is measured by two key metrics - paid clicks and cost-per-click (CPC). Paid clicks represent the traffic for a sponsored link, while CPC is the amount that an advertiser pays to Google each time a paid click occurs.

Investors and Wall Street alike focus heavily on CPC because Google's revenue is directly impacted by this metric. More than that, it shows the appetite of an advertiser to put ads on Google. If Google's CPC is declining, it suggests that advertisers are cutting their budgets since Google is an indispensable part of the industry.

[Related -Boost Your Dividend Yield]

The most important element of Google's fourth quarter earnings was the strength of the shares the following day despite the 6 percent decline in CPC. Google gained as much as $46, or 6.5 percent, to $749 on Jan.23, the day after its earnings report that also showed aggregate paid clicks rising 24 percent.

The strength in the shares shows that the market is now comfortable with the idea of secular pricing declines across online advertising. Since mid-June, Google has climbed a "wall of worry" as investors digest cost-per-click declines.

Moreover, investors need not worry too much about the decline in the CPC, which is closely related to the economy. When the economy improves, the number would increase.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

However, Google's margins continue to erode over time, and that there continues to be no return of capital to shareholders, making it less attractive for investors seeking returns in the form of dividend or share buybacks.

"As such, we believe that profile makes the shares compelling at or below market multiples (particularly to value investors), but much less so when forward P/E begins to approach the high teens," BMO Capital Markets analyst Daniel Salmon said in a client note.

In addition, the stock's forward non-GAAP P/E multiple has moved to 17 times from June 2012 levels of 12 times, making it less compelling opportunity for value investors.

"We see multiple expansion beyond the current level as a challenge. Our basic view of  Google as a 15%-20% top-line grower with gradual margin erosion is unchanged. Combined with a lack of share buyback or any other EPS growth accelerant, we believe this profile is much less compelling to value investors at 17x versus 12x," Salmon added.

That said, Google is still the bellwether online advertising company and that it can continue to generate 15 -20 percent revenue growth for the next three to five years, with an average earnings growth of 13.75 percent in the next five years. That is why 29 of the 38 analysts covering the stock rate it as a "strong buy" or "buy," while the rest recommend "hold."

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageInitial Jobless Claims Rose Unexpectedly

Claims unexpectedly rose in the latest report through last weekend to breach 300,000 for the first time read on...

article imageAll Quiet on the Record High Front

What can we glean from the media’s lack of attention to the market’s recent record read on...

article imageThe Chip Maker Short Sellers Should Be Watching

Investing in semiconductor stocks is always tricky. Industry cycles can lead to bumps in the road for the read on...

article imageChicago Fed: US Economic Growth Slowed In October

The pace of US growth slowed more than expected in October, according to this morning’s update of the read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.