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Google Is Going to $1,000 … and Then Some

Google (NASDAQ:GOOG) has been on a tear in the last year or so. In summer of 2012, Google stock was trading as low as $560 — and now, GOOG is above $900 for a 60% gain.

After the recent Google I/O conference, enthusiasm is at a fever pitch. But with GOOG at all-time highs, the million-dollar question is “Will Google stock keep this up?”

Or if you’re a fan of round numbers, perhaps you prefer the variant “Can Google stock crack the $1,000 mark this year?”

I think the answer to both is in the affirmative.

Google has the wind at its back, both in regards to share appreciation and product rollouts, and I think $1,000 is just a stop on the way to much higher prices for this tech giant.

The natural comparison people make is to Apple (NASDAQ:AAPL), a one-time tech darling that has crashed and burned as of late. Who’s to say Google won’t do the same? Or perhaps you prefer the analogy of Facebook (NASDAQ:FB), which is a cult sensation with many Internet users but has seen its stock stagnate thanks to struggles created by the move to mobile from desktop advertising.

There are some fair comparisons here. Apple’s fading dominance and decaying margins are a cautionary tale, and Facebook’s struggle to monetize mobile is a shared risk. Just recently, in Google earnings released in late April, we saw GOOG revenues fall short of analyst expectations. More importantly, the “cost per click” — a key advertising rate — fell 4%, the fourth consecutive quarter that figure has fallen.

But here’s what Google has going for it that Apple and Facebook do not:

Momentum: While Facebook and Apple continue to suffer in the eyes of consumers and investors alike, Google stock is red-hot and its brand remains powerful with Internet users, even in 2013.

Strong Top Line: There are zero top-line growth problems at Google despite some hiccups lately. Google’s sales have increased over 30% in each of the last three consecutive quarters while many other tech stocks — heck, many other blue chips in every sector — have resorted to cost-cutting to juice profits as sales flatline.

Diversified Revenue Plans: Sure, online advertising remains its bread and butter. But in its 10-K for 2012, the company reported that “other revenues” hit $829 million in the last fiscal year — 6% of total revenue. With recent announcements including subscription-based YouTube channels to compete with streaming video providers like Netflix (NASDAQ:NFLX) and the more recent Google Music venture that could battle Pandora (NYSE:P) or privately held Spotify, clearly it is gunning for a way to make cash beyond display ads.

Hardware: This is worth its own bulleted item, since Google is starting to gather steam in the wake of its 2011 buyout of Motorola for $12.5 billion. Its Nexus family of devices — recently revamped and revealed to great fanfare at the I/O event — is starting to catch on with smartphone and tablet users. Its rumored “X Phone” and Google Glass remain favorites of the rumor mill and gadget geeks everywhere. And yet Google is still very much seen as an Internet media company. If it figures out higher-margin hardware, look out.

Patience: But this quest for cash in either services or hardware is not born out of desperation — a point that must be made. Facebook and Apple are under pressure to change the narrative, but Google continues to be patient and focused in its ventures. Take Google Fiber, a growing venture that is trying to compete with the likes of Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) by providing cheap, high-speed Internet. When you have the confidence of investors and a whopping $50 billion in bank, you can afford to be patient and stick with long-term projects even if there’s no immediate payday.

Buyout Behemoth: Nothing keeps your company on the cutting edge like a steady influx of new ideas and, more importantly, very talented folks with an entrepreneurial bent. Consider that Google acquired Android Inc. for a mere $50 million in 2005 … and it took years to figure out how to make this smartphone OS fit into the company strategy. But now it’s a smash hit — a testament to incubating good ideas instead of throwing up desperation long-shots because you have to impress Wall Street or fix flagging fundamentals. While many investors think serial buyouts are a dumb idea, for an innovative tech company like Google, it’s an important long-term strategy.

There are admittedly concerns that new money is buying a top in Google. But most of the valuation metrics are pretty fair, especially considering the high growth GOOG has seen and is predicting going forward.

Google has a forward P/E of only about 17 right now — right on par with the forward P/E of the entire Nasdaq 100. Is the entire market overbought? Well, that’s a separate debate. But based on its strong fundamentals and analyst optimism, Google is pretty fairly valued.

And remember that earnings multiples are based on estimates. If GOOG continues to exceed expectations, there’s certainly no problem.

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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 did not own a position in any of the stocks named here.

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