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Google It: This Tech Stock Is a Lock at $650 a Share

Admittedly, long-term tech investing is a fool’s errand. The constant disruption in both consumer technology and enterprise IT demands a constant re-assessment of the tech sector.

But given the track record at Google (NASDAQ:GOOG), its cash hoard and the ambitious projects in the pipeline, it’s safe to say that this tech stock is pretty safe.

So should you consider Googling it with hopes of big gains a year or two from now?

Maybe. Though its recent drop and earnings snafu are causes for concern, if Google stock fades to the low $650s, I may snap up some shares.

Google Chart
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There are risks that Google stock could keep dropping, of course, but I feel like $650 is a good floor. It’s a round number, for one, and that matters. Also based on past history (check out the chart at right) and long-term growth prospects, there’s a reason to give Google a chance despite its recent troubles.

Here’s why:

Long-Term Fundamentals

Earnings have grown rapidly in the past five years — from $13.31 per share in 2008 to projections of $32.25 in fiscal 2012 according to Standard & Poor’s. Revenue has grown impressively too, from $21.8 billion in fiscal 2008 to a projected $41.5 billion this year. That’s almost triple the profits and double the sales!

Five-year growth of 20% is nothing to sneeze at … and considering the past five years on a macro perspective, it’s even more impressive.

Valuation

Meanwhile, Google’s valuation (at least measured by P/E) has plummeted since share prices haven’t budged.

Barring a pop coinciding with the market’s all-time high in late 2007, Google bounced around between about $500 and $600 in the years before the recession. And excluding the big lurch down during the Great Recession, it has bounced around in a similar range for much of the past two or three years.

As result of big earnings growth and stagnant share prices, Google’s valuation multiple has dropped like a rock. Just take a look at this chart.

GOOG PE Ratio TTM Chart

GOOG PE Ratio TTM data by YCharts

Big Hardware Plans

Here’s where things get speculative. But stick with me:

Google made a big buyout of Motorola Mobility to get its hands on hardware knowhow and patents. It has since rolled out an ambitious line of Nexus devices — a 4-inch smartphone, a 7-inch mini tablet and a 10-inch premium tablet — to compete with the Apple (NASDAQ:AAPL) iUniverse and Amazon (NASDAQ:AMZN) Kindle line, among other mobile devices. Reception is good — check out this review for one example — and there’s talk of continued hardware rollouts including a $99 product in the works.

And longer term, don’t forget Google’s flagship Android operating system. Google pledged to leave its OS open source after the Motorola deal, but sometime down the road they could close that door. Hewlett-Packard (NYSE:HPQ) CEO Meg Whitman speculated on that very issue several months ago. If this happens, it could be a double whammy — hamstring competitors and also drive consumers to its own branded devices. Considering the massive 75% market share that Android commands on all mobile devices, this is a powerful scenario.

This is all just a hunch, of course, since hardware is certainly not a cash cow currently for Google and those kind of proprietary tactics are admittedly out of line with the “don’t be evil” credo in Mountain View … but it’s worth considering.

Cash King

As of its September 30 10-Q, Google reported $16.26 billion in cash and another $29.46 billion in marketable securities for a war chest of $45.72 billion.

Of course, not all of that is readily available. According to 2011’s end-of-year report, Google said, “As of December 31, 2011, $21.2 billion of the $44.6 billion of cash, cash equivalents, and marketable securities was held by our foreign subsidiaries.” The number has changed slightly since then, but the idea that tens of billions in cash can’t be repatriated without penalties is an important point.

Still, that leaves over $20 billion in domestic coffers, more than enough to be dangerous with buyouts or innovation … or perhaps even back up a dividend?

The Risks

There are obvious risks, however, especially after Google’s earnings snafu. Three major downsides include:

  • Loss of momentum: Google stock is off more than 10% since mid-October.
  • Recent profit slump: That selloff is in large part due to poor Google earnings that showed net income sank to $2.18 billion, or $6.53 a share, from $2.73 billion, or $8.33 a share, a year earlier.
  • Mobile ad challenges: The most disturbing details of Google’s earnings concerned mobile. The company reported that the “cost per click” advertisers paid dropped 15% from Q3 last year. The general consensus is that mobile ads are just less valuable for companies because they are smaller or harder to click on or just not as effective — an issue faced by other Internet giants such as Facebook (NASDAQ:FB).

But given Google’s reach, its potential with new hardware and its continued growth, I think it may be worth taking a shot on this tech titan.

After all, folks looking to hit “eject” on Apple have to go somewhere… right?

Related Reading

  • Google’s tablet may be a “gamebreaker.” (The Motley Fool)
  • A “tradeable bounce” may be on the way for GOOG. (Forex Pros)
  • In late October, the Johnson Research Group pointed to $660 support for Google… so maybe a buy point is a bit higher than my target of $650. (InvestorPlace)
  • And for the conspiracy nuts… was the big drop after earnings based on a computer glitch? (EE Times)

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but no other stocks named here.

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