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Why Google Is Cheap Now

Google (NASDAQ:GOOG) has broken out, gapping up more than 5% Wednesday on a strong earnings report. Tech giant IBM (NYSE:IBM) also rose thanks to nice numbers, though Apple (NASDAQ:AAPL) took a hit after the bell as investors cringed at its report.

For Google stock, this could be just the beginning of a great run.

First, the earnings details if you missed them: Q4 is typically Google’s biggest period, so this was an important report on the heels of the PENDING LARRY QUOTE snafu and disappointing numbers we saw the previous quarter. Google rose to the occasion, with revenue surging almost 40% and strong profits that increased and beat estimates. Yes, cost-per-click numbers were soft again, but ad rates and market share still are in Google’s favor.

So in short, the online advertising business is still going well. To steal a quote from analyst Jonathan Yarmis, interviewed for a USA TODAY earnings wrap: “When you strip away all the fun-to-talk-about stuff, Google remains a one-trick pony — and it’s a damned good trick.”

This money-minting ad dominance is why investors continue to believe in Google. And going forward, there are many reasons to think GOOG will keep laying golden eggs for the short- and medium-term. Plus, if mobile ad disruption isn’t a giant killer, there are several other factors that make Google an attractive bet in the long-term, too.

Long-Term Fundamentals: Earnings have grown rapidly in the last several years, tripling from $13.31 per share in 2008 to projections of $41 in fiscal 2013, according to Standard & Poor’s. Revenue has grown impressively too, up 130% from $21.8 billion in fiscal 2008 to a projected $51.1 billion fiscal 2013. Yes, the dynamics of online advertising have changed thanks to mobile, but Google’s 55% market share of 2012 mobile ad business means growth in impressions and clicks will keep the numbers moving higher. Just look at the forecasts and guidance for proof.

Relative Valuation: The valuation is a little pricey for GOOG stock right now compared to some other tech companies, with a forward P/E of 18.1 based on FY2013 forecasts. But that doesn’t mean it’s not fairly valued based on its personal history. Check out how the multiple has been steadily dropping over time. Compared with a few years ago, 18 is in fact pretty fair.

Android Dominance: The power of Google is that, while it did buy Motorola, it still allows anyone and everyone to play with its operating system and isn’t aggressively focused on making its smartphone dominance hit the bottom line in a substantive way. Consider that a Q3 2012 survey showed Android powered an amazing three in four phones worldwide! And consider Google powers the Kindle from Amazon (NASDAQ:AMZN) as well as smartphones from Samsung despite working on its own branded Nexus device line. There is so much hardware potential here now that GOOG has achieved this kind of scale with consumers, and you can expect the company to capitalize on that dominance in the years ahead. Apple should be worried.

Not a Charity: Google has made some waves recently with moves that some think fly in the face of its “don’t be evil” philosophy. That includes using lawyers to beat back ad-blocking software in France and charging small businesses for Google Apps, among others. Some of this should not be a surprise, since Google has gotten more pragmatic since Larry Page took over as CEO in 2011 by shutting down dozens of projects that didn’t have potential and acting like more of a business. This kind of philosophy is unpopular with some consumers, but Google seems to have figured out that it can’t act like a charity. A certain attention to the bottom line is necessary for both building shareholder value and ensuring Google remains dominant and on task in the years to come.

Cash King: Google has a rock-solid balance sheet, with cash and short-term investments of nearly $48.1 billion — up $2.4 billion from last quarter. Free cash flow is a strong $3 billion. Yes, critics will point out not all of Google’s overseas cash is readily accessible … but it’s still sitting pretty.

Always Innovating: Remember, Android was purchased and developed in-house for years before consumers and investors could even dream of the potential behind this OS. And right now Google is playing with self-driving cars and a fiber optic network in Kansas and web-browsing glasses and pushing hard into the data center and cloud-computing biz. Right now the web is abuzz with the “x phone” that would boast a remarkable battery life, wireless charging capability and a virtually indestructible design, among other features. This is not a company just repackaging existing products and begging for an upgrade cycle like some fallen tech stocks — sorry, Microsoft (NASDAQ:MSFT) shareholders.

Global Growth: While the Great Firewall of China presents obvious barriers, Google continues to grow briskly abroad. Many investors may not realize that over half of all revenue comes from overseas — 54% in Q4 of 2012, up from 53% in Q4 of 2011.

There’s a lot to look forward to here, even if just some of these items live up to their full potential. I wrote before Thanksgiving that Google stock was a lock at $650 a share, and the Internet giant has rallied 15% since then when you bake in this earnings pop.

But the bigger gains could be long-term. Yes, investors are happy the ad business appears to have stabilized in the short-term. But Google has tremendous long-term potential … even if it doesn’t pay a dividend yet.

Anything can happen, and a disruption to the ad business or an amazing competitor could disrupt Google. But if Facebook (NASDAQ:FB) with its unloved ads and Social Graph technology is the best challenge Google has, I think the next few years will be worry-free in Mountain View.

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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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