GOOG

Investment Analysis Clubs Saul’s Investing Discussions
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I was recently reading about all the interesting things that Google is doing. How they are integrating Android in automobiles, specifically among other things, and I saw that GOOG has not only been recommended along the way by my two favorite MF newsletters, but it is a Core Stock in both newsletters. Sounds good doesn’t it?

But then when I look closer I find that this is a company that is already huge, whose Revenues are already over $10 billion per quarter!. I wonder how much room do they have to grow? Can I realistically see them tripling their revenue any time in the next half-dozen years?

Then I look at their rate of growth: Revenues were up 20% for the first 9 months of 2013 (we don’t have the December quarter yet), but Earnings were only up an average of 9.5% during the first nine months, or 10% if we look at the trailing 12 months. Earnings are growing at half the rate of Revenues. Bad sign.

Okay, convince me. Why should I start a position in this elephant of a stock when there are lots of gazelles and cheetahs recommended by the MF? What am I missing? I already know GOOG does a lot of neat things. I’m wondering about growth, and why earnings growing at half the rate of revenues, and where they can realistically go at the size they are.

Saul

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Oh, and with earnings growing at 9.5% it’s selling at a PE of 27. I know that the Gardners like stocks to be overpriced, so I guess this qualifies.

Saul

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How do you get a PE of 27?

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Okay, convince me

Coincidentally, I cut my GOOG position in half this morning. I hadn’t seen this board thread yet. Mostly my selling was due to portfolio adjustment as my position had grown outsized, rather than anything specific about the company itself. I also cut my Amazon position in half for the same reason.

Having said that, these don’t seem like your kind of companies, Saul (though take that with a large grain of salt, because I don’t really understand yet what your kind of companies are).

I think Google still has a fairly wide moat, but I also think Amazon is a big threat to them (more so than Facebook, IMHO, despite FB being the hot property at the moment). Google’s advantage with search ads is that they’re targeted: if I’m searching for something particular, Google can serve me an ad from someone offering that something and I’m very likely to click on it. That’s different than Facebook, which is showing me random stuff while I’m trying to catch up with distant friends and family.

The threat is that I just go right to Amazon to do my retail searching and skip Google altogether. I find myself doing that more and more these days, and only turning to Google when I can’t find what I want at Amazon. The more that Amazon’s selection increases while keeping prices reasonable (and offering cheap fast shipping through Prime), the more likely I am to go directly to them. eBay also seems to be growing in stature as a one-stop shop for brand-new stuff (as opposed to their traditional auction business) – it’s now my mom’s second stop after Amazon.

In a lot of ways, I increasingly see Google like Microsoft: they have a single cash cow that funds a whole bunch of other initiatives that are interesting and perhaps complementary, but aren’t themselves anything I want to invest in at this stage. And while I don’t think that cash cow is going to disappear, it’s questionable to me whether its moat will expand or contract over the next 5 years. So I’m still a shareholder, but I don’t want to be overly exposed.

Neil
Long GOOG, AMZN, EBAY

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Thanks Neil. Excellent discussion. I agree. I don’t think it’s my kind of company, but it may be someone else’s.

Saul

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How do you get a PE of 27?

Trailing adjusted earnings (last four quarters) of $42.48, divided into price of about $1150, equals 27.07

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…Hey Saul…

…how about MZOR?..

…it’s Market Cap is 500M…

…I realize it doesn’t satisfy several of you parameters, but holy cow could this thing run…

…in my opinion of course… :slight_smile:

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I’ve been thinking of selling my position in google for similar reasons. When I look at google I feel like they are going to see PE compression at some point because of the large numbers involved. Really big market caps seem to equate to PEs below 20, Amazon being a huge exception. I like the company a lot but am feeling like my money has a shot at better returns elsewhere.

I’ve only been investing for about a year and am at a point where I’m re-evaluating my early positions. I probably spread myself too thin when I started, I’m at 42 positions and I’d like to bring that down closer to 30. As I’ve gotten the first year under my belt I’ve been drawn more towards companies with smaller market caps. If I sold I’d take the money from google and increase the size of one or two smaller positions.

Thanks for starting this board Saul, it’s been incredibly helpful to learn from your experience :slight_smile:

Paul

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Hi Saul,

Trailing adjusted earnings (last four quarters) of $42.48, divided into price of about $1150, equals 27.07

Google Finance reports TTM $34.81, Yahoo reports $36.75 , Fidelity reports $34.81 so that’s why I was curious where you got a PE < 30 from.

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fdoubleol,

I looked on their website at their last four earnings reports, and pulled the adjusted earnings off each one. It’s much more reliable to do it that way instead of looking at YHOO’s estimation, etc. On the other hand, YHOO was looking probably at GAAP earnings, which some people prefer, while I was looking at their actual cash, money-in-the-bank earnings.

Saul

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…how about MZOR?..it’s Market Cap is 500M…

Hi Huibs,

It could run, sure, but it’s not my thing. They had revenue of $3.1 million last quarter, and adjusted losses of over $3.1 million, which means expenses of $6.2 million. And GAAP losses of over $3.5 million which means $6.6 million in expenses. Means zero chance of even breaking even, much less making money, next year. Their Revenue was a million less in the Sept quarter than the year before! You mentioned that their Market Cap is $500 million. Well their sales will be about $18 million. What’s their P/S ratio? To have a PE of 50(!) times earnings they’d have to have Earnings of $10 million(!). Earnings of $10 million!!! for a 50 times PE ratio!!!

If that’s your thing, go with it. But it’s just gambling in my opinion, hoping some naive person will come along and pay more for it than you paid.

Saul

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And I forgot to point out that that is if the price stays the same. If the price were to “run” as you hope, say up 50% for example, the market cap would be $750 million, and to have a PE ratio of 50 they would need earnings of $15 million, almost as much as their current revenues, for which their expenses are much more. Nope, not for me.

Saul

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It could run, sure, but it’s not my thing.

…hey Saul, thanks for your post!..

…I wanted to find a stock I owned that was the antithesis of the stock in question, GOOG, and MZOR was it… :slight_smile:

…I like to “salt and pepper” these types of “pre rule-breakers” into my portfolio from time to time, and the two I own today that fit this category are ONVO and MZOR…

…I have ~1% in total net worth in the two stocks, so they could disappear without me noticing…

…but they’re story stocks, and if the story continues, I believe they can grow to become quite large…

…I’m up 327% in ONVO and 56% in MZOR, although I’m looking 5-10 years out for each of them, but guessing both will be bought out before then…

…I’ve annualized returns of ~23% for the last 20 years, including real estate (I just look at net worth over time) so you have me beat, and what I find most intriguing about your returns is the consistency, year after year…

…I’ve had several boom and bust cycles in the past 20 years, and I’m here to try and glean your secret to smoother, consistent returns…

…based on your reaction to MZOR, I think I have lesson one… :slight_smile:

…congratulations on the board, and warm regards…

…huibs…

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Hi Huibs,

…I have ~1% in total net worth in the two stocks, so they could disappear without me noticing…

It sounds like you recognize the risks. I have nothing against gambling with 1% of your money and have occasionally done the same. I agree, the hope with stocks like those is that they get acquired.

Remember that if there is a pullback in the 3D printing stocks to more rational levels, a stock with no earnings, or even hope of earnings, like ONVO, may get hit a lot harder than say a SSYS.

…I’ve annualized returns of ~23% for the last 20 years, including real estate

That’s great! I have only 24% when I factor in the huge loss in 2008. But I only include how my stock investments are doing and don’t figure real-estate, which isn’t my thing anyway.

Best of luck,

Saul

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