Google: Still a Buy at $1,000

11/07/2013 7:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Despite its stock price having topped $1,000 per share, this search engine leader remains a buy, says Ian Wyatt, editor of $100K Portfolio.

Google (GOOG) is finally getting the respect it deserves. The company reported a great quarter and the results sent shares soaring 14% in a single trading session.

The search engine giant blew past third-quarter earnings estimates, with net income increasing 36% from a year ago. Revenue growth was also very healthy at 12%.

Google's profits have increased every year since the company went public in 2004—even during the lean years of the Great Recession. The company is continuing to grow at a rapid rate, even as the company grows.

What should really sustain Google shares over the long run is the company's expanding mobile advertising presence.

In July, Google began requiring advertisers to buy mobile ads whenever they buy desktop ads. As a result, ad sales rose 22% last quarter, after falling short of 20% growth for four straight quarters. Ad volume also surged, with paid clicks increasing 26% from a year ago.

The mobile advertising market is growing exponentially. US mobile ad spending in the first half of the year reached $3 billion—a 145% improvement over the first half of 2012. As that trend continues, the companies that can take advantage of mobile expansion stand to prosper.

In our $100k Portfolio, I first recommended Google shares in September 2010, when the stock was trading around $475.

The shares languished for a while after my initial recommendation. In fact, the stock basically moved in lockstep with the market from September 2010 through August 2012. The returns were decent, but nothing special.

But Google is up 49% over the last year, compared with gains of 32% for the Nasdaq and 24% for the S&P 500.

A large part of that stock performance is due to Google's continued dominance in the Internet world. The company continues to deliver a strong core pay-per-click ad business.

Google owns YouTube, which is a leading video site. And the company has a strong and growing business, helped by its Android platform.

Google's valuation has been rising, as investors have gotten on board with the Internet and mobile giant. When I first recommended Google, shares traded at 12-times forward earnings (on an enterprise value basis).

Today that multiple has increased to 16.5. This means that Google shares have been rising, due to both earnings growth, and expansion of the valuation multiple.

But even at $1,000 per share, Google shares remain fairly priced. The stock today appears to be trading at an appropriate valuation. The upside of the stock is smaller now than it was three years ago. But the growing business should be enough to offer investors another 15-20% upside over the next year.

Google remains one of my favorite ways to invest in the growth of the Internet and mobile, and I continue to recommend buying the stock at around $1,000.

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