Friday, July 15, 2011

Google's 2nd Quarter 2011 Earnings

Before today's big move in the stock, Google (GOOG) had an enterprise value to earnings multiple of approximately 14x.

Even if not cheap, certainly not expensive either.

Well, the company had one heck of a 2nd quarter and today's stock market reaction reflects it. Shares in Google are up more than $ 60/share this morning, roughly 12%, from yesterdays close of $ 528.94. The stock is now selling for more than $ 590/share.

This Bloomberg article summarizes some of the results. Net income in the 2nd quarter increased 36 percent up to $ 2.51 billion compared to the same period last year.

Google's Shares Advance

Revenue also increased over 30% in 2nd quarter 2011 compared to 2nd quarter 2010.

Minyanville added these additional thoughts.

Google's Blowout Earnings

Considering Google's excellent core economics and prospects the stock had become remarkably cheap. It's a rapidly growing company that produces impressive return on capital while maintaining a substantial moat around, at least, the core search business. Businesses with those characteristics seem to, more often than not, end up overvalued.

"Google has a huge new moat, in fact I've probably never seen such a wide moat." - Charlie Munger at a 2009 Press Conference

Google's moat is definitely wide but that doesn't mean it has the durability of something like Coca-Cola (KO). The company clearly has a great position but knowing what the search business will look like in ten years is not an easy call. Coca-Cola's place in the world of beverages ten years from now is far more certain.

Google is financially strong and seems to be gaining traction on multiple fronts. It has roughly $ 34 billion in net cash on the balance sheet. Few companies can generate over $ 10 billion per year in free cash flow yet are still growing at a 30% clip (though Apple has more than 2x the free cash flow and is growing even faster).

Yet, as an investor, you just can't own a Google the way you can own one of "The Inevitables":

Buffett on "The Inevitables"

Companies such as Coca-Cola and Gillette might well be labeled "The Inevitables." Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving-equipment business these companies will be doing in ten or twenty years. Nor is our talk of inevitability meant to play down the vital work that these companies must continue to carry out, in such areas as manufacturing, distribution, packaging and product innovation. In the end, however, no sensible observer - not even these companies' most vigorous competitors, assuming they are assessing the matter honestly - questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime. - Warren Buffett in the 1996 Berkshire Hathaway Shareholder Letter

I'd say, best case, Google is more likely one of the "highly probables".

Considering what it takes to be an inevitable, Charlie and I recognize that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty. To the inevitables in our portfolio, therefore, we add a few "highly probables." - Warren Buffett in the 1996 Berkshire Hathaway Shareholder Letter

After today's move in the stock Google may not be quite as cheap, but there are many inferior businesses selling for much higher multiples of earnings these days.

Adam

Long position in GOOG established at much lower than recent market prices
 
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