Bucking The Trend

My worked turned out to be correct in that Google would best analysts estimates in 4Q. See my prior write-ups here, here, and here about Google's 4Q. I got in aggressively in the $250-$275 price ranges so I am up between 25-35% on my investment.

Most of my analysis was correct except for CPC pricing, which declined while I was expecting growth.

I will likely take some profits soon as the overall market moves up due to Obama's Good Bank, Bad Bank stimulus package. However, when everyone realizes that these stimulus plans are ineffective, the market will head south and Google likely with it.

I am still a strong believer in Google as a company and a stock to hold for the long-term and believe that the market is undervaluing the company. I will continue to provide updates on my work on Google's fundamentals for 1Q09 so look for that in coming weeks.

However, I think it is difficult to hold onto any equity, except gold stocks, with conviction given the state of the economy, but money could be made in the short-term by trading the quarters. That practice though is risky and requires good analytical work of the kind I did with Google.

Meanwhile, a report on Google's 4Q by Jeetil Patel of Deutche Bank, one of the best on the Street provides more insight and recommeds purchasing the shares on weakness in the share price.


Reiterate BUY investment rating - $390 Price target

We would be buyers of shares of Google at current levels and on any
price weakness, particularly as prospects remain bullish for the
company (despite our expectations of a more cautiously optimistic
view). Google delivered 4Q revenue/EPS upside, driven by 18% click
volume growth (the peg for the multiple), healthy opex controls
(thanks for the shareholder friendliness) and 27% profit growth. In
2009, while paid search (gross) revs will increase 7%, note that
click volume growth of 13% should yield 20% profit growth.

* Growth in tact, while new opex lever fuels EPS upside in 4Q

Google beat 4Q expectations as revs increased 4% Q/Q (vs. 3.7% est.)
and EPS of $5.10 was in-line with our $5.13 est. (Street at $4.96).
With opex controls inplace and volumes still healthy, we think that
Google continues to execute well in a tough economic environment.
With increased emphasis on ad optimization (i.e. higher click-
through on inventories), Google may be able to capture un-spent
marketing budgets in coming quarters. The unknown lies in the
response/intentions on marketers as the economic environment
potentially worsens. Nonetheless, we expect 13% volume growth in
2009 and 5% CPC deflation from mix, forex headwinds and emerging
markets.

* Slightly raising estimates

For 1Q 2009, we are modeling net revenues/EPS of $4.25bn/$5.17 vs.
$4.30bn/$5.09 previously. For 2009, our estimates now stand at
$18.1bn in net revenues (+14%Y/Y), $11.1bn in EBITDA and $21.80 in
pro-forma EPS, compared to $18.1bn/$10.71bn/$21.45 previously. 2009
gross revenues are expected to increase 7%, impacted by the US
dollar strength. We are also introducing 2010 estimates, with
revenues of $21.2bn (+17%Y/Y), EBITDA of $13bn and $25.94 in EPS.

* Valuation & risks; $390 price target (vs. $480 previously)

Our new price target of $390 ($480 previously) is based on 18x our
2009E EPS of $21.80 and 15x 2010 EPS and 17x 2009 FCF. We assign a
premium to Google's blended peer group average of 16x consensus
2009E EPS. We believe a premium is justified given the company's 20%
annual profit growth outlook, almost double its peer group's average
growth of 10%. Investment risks include: slowing query growth,
slowdown in ad spending, competition, currency fluctuations, tech
obsolescence, and new interactive media.