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GARP: Google at a Reasonable Price

The old adage of buying growth at a reasonable price could apply to Google Inc. (GOOG). Year to date, Google shares are off by 32.8%, and even further percentage wise off its peak of $747.24 hit months ago in November. The stock has not traded above $500 since Feb. 22. The downturn has been hinged on data that show Google’s click-through ad rates have faltered. According to comScore data, Google’s click-through rate grew just 3% in February compared to the year ago period, on the heels of January’s report that saw no growth. Troubling to say the least, but there is an explanation for the decline that doesn’t imply that the poor numbers are a result of operating in a recessionary environment. Recently, Goldman analyst James Mitchell in maintaining his “buy” rating on the search goliath said that the recent deceleration in the company’s paid click growth “reflected self-inflicted changes to improve the find-to-search ratio.” Following up on that a few days later on Apr. 4 was Bernstein Research analyst Jeffrey Lindsay. According to the Associated Press, he said that “what comScore doesn’t give is the other side of the story – the pricing or cost per click, which Google has been successfully driving up for several quarters now.” In other words, Google’s efforts of removing low quality advertisers has driven paid clicks down, but at the same time is also driving keyword pricing higher. Though analysts did trim estimates, Google earnings are still expected to grow 25.5% this year to $19.57 per share and 23.2% over the next fiscal year with earnings of $24.11 per share. According to consensus estimates, revenue is expected to rise by 36.3% to $15.90 billion and 27.2% over the next fiscal year to $20.22 billion. With that in mind, Google has managed to come off its 52-week low of $412.11 in the past few days, but the stock is still trading at a fairly cheap forward PE of 23.9 with a PEG ratio of .80, especially considering historical valuations. Google’s current depressed valuation is reminiscent of Apple Inc. (AAPL) which actually flirted with value stock territory in February before it began to move out of the tech basement. Technically speaking as well, things are shaping up for Google to move out of the cellar. Since mid-March, Google shares have been in a mild uptrend and are threatening to head higher with a definitive close over $475 resistance and the 50-day moving average at $476.24.

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