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(MENAFN - Khaleej Times) In August 2004, when Google went public at $85 a share, I pleaded with my friends to buy the shares and recommended them in successive columns.
But that was then and this is now. While Google beat the Street on both revenue growth and EPS last week, it shares were sandbagged by investors who had priced in the Panglossian best of all possible world and were rattled because international revenue growth clearly lagged US search ad revenues. In any case, the ugly sentiment in the stock market was not exactly calculated to boost the prices of high multiple growth stocks. Yet Google has now lost $79 from its recent $629 high. In essence, Google now trades at a market multiple of 17 times earnings. There are several bullish catalysts for Google in the next six months.
One, international growth for Google websites will accelerate.
Two, Google is no longer a one trick online advertising pony, even though no less than a phenomenal ninety eight percentage of revenues derive from paid search. YouTube and display networks will provide the next revenue growth ballast.
Three, Nexus One sales could ramp up in 2010 to 700,000 units.
Four, online advertising is the growth frontier in new media.
Five, Google's My Space and AOL contracts will result in greater revenue sharing.
Six, Google free cash flow has surged to $2.5 billion in Q4 and the firm has $25 billion in cash it intends to manage aggressively in the securities markets. The Android smart phone and Chrome operating system will spawn a cash tsunami. In a stock market correction, growth stocks get hit the hardest. It will be no different this time. Yet how low can Google fall in 2010? I use the consensus Street estimate of $30 EPS for 2011 as my lodestar for valuation.
The financial markets are clearly frazzled by Microsoft's Bing search engine's competitive threat, uncertainty about consumer spending in key markets and the recent dispute with China about its censorship Great Firewall. This has now escalated into a diplomatic dispute between the US and China, with Beijing responding to Hilary Clinton's speech with accusations of "informational imperialism". The US Trade Representative even seeks to bring WTO ease against China for online restrictions on Google.
So how much risk is in Google now that the shares have fallen to $550? I estimate about $60 additional risk. After all, since I believe revenue growth and EPS will reaccelerate, the current market bearishness and skepticism about Google is a unique opportunity to accumulate one of Silicon Valley's most revolutionary brands, a corporate icon that attempts nothing less than to organise the world's information. Google, in my opinion, cannot and will not trade below $480 or 16 times its forward earnings. Larry Page and Sergei Brin's filing to sell 5 million shares each over five years will also depress investor sentiment on Google in the months ahead. So my strategy is to take advantage of lower prices and higher Chicago VIX volatility to design put sales on Google, ideally positions where the worst case scenario is delivery at $480 - 490. This is my "Do Not Evil" trade!
Investors who accepted my thesis that Microsoft was a superlative buy at 18-20 and Cisco was a beauty at 15 (but expensive at 25) have now ridden the Big Tech rally to its logical conclusion. However, as I never tire of reminding myself, the trend is only your friend until the trend comes to a wn end.
The omens for a broader Nasdaq and risk correction are all too real. Note Intel was slammed even though it beat the Street, as was Google. Amazing that Barack Obama has chosen to punish Wall Street money centre banks at a time when the economic recovery is fragile, one third of the world's industrial capacity is idle and 15 million American workers have no jobs. The Chinese inflation and GDP growth data prove without a shadow of a doubt that the Peoples Bank of China will have to tighten monetary policy beyond its recent hike in the banking reserve ratio. Moreover, selling on higher volumes and the violation of index uptrend lines means that the SP500 can well fall another 60 points to 1030, in a classic 10 per cent correction. Note that Cisco, Intel and Google have already fallen 8 - 10 per cent from their recent highs. Beautiful.
Nasdaq at 2300 reflected inflated expectations and Citigroup cut ratings on seven semiconductor equipment shares, with the possibility of a one third fall in the sector.
Apart from the usual earnings beauty parade, next week will be dominated by populist Democratic threats to scuttle the Senate confirmation of Ben Bernanke. Even Harry Reid, the Majority Leader, has hedged his vote against the nomination as Congress rails against Wall Street bailouts.
Meanwhile, almost forgotten, the FOMC meets on Tuesday and we will witness a blowout GDP number, thanks to inventories. As the Davos talkfest begins next week, a political ill wind from Washington (and Beijing, Athens and London!) seems to haunt the world of finance, full of sound and fury, signifying nothing. Google 480 is, alas, not unthinkable, even if I am guilty of a Freudian subliminal wish!
(MATEIN KHALID (Money Maze) - Views expressed by the author are his own and do not reflect the
newspaper's policy.)
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