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Friday, November 23, 2012

Google... brilliantly shifting

Over the past year, Google had an interesting roller coaster ride of perception. Earlier in the year, the influencer-blogger-class all were spewing garbage chatter that Google was the next Microsoft. Despite the clear evidence and blatant comparisons to the contrary. That perception has allowed Google to trade at recession level trailing multiples (below 19) in May/June of this year.  (The market was being stupid.)

(A blog search for GOOG or Google will bring up all my thoughts on Google from earlier in the year.)  The market has now witnessed how rapidly Google can transition. The rate at which is simply awesome.

1. The revamped Google Play has become a worthy competitor to iTunes.

2. Google's branded phones/tablets, Nexus line, are gaining brand recognition and have high demand. (The line is no longer an avenue to push higher standards with OEMs, it has become a sought after brand.)

3. Google mobile services are simply kick-ass.

4. Google's voice recognition technology (Google Now) is at par, and arguably some what better, then Siri.

The shift has not gone unnoticed. The market has rewarded Google with an expanded multiple (higher valuation). It currently trades at a trailing multiple of around 21. Thats about a +25% increase from its 2012 troth.

At the moment, the market appears to be efficient with Google's stock price.  IMO, in order for Google to maintain its 19-21 multiple it needs to make better progress with its hardware profitability.

As the post PC world rapidly takes over, I fear desktop search will erode far more quickly than analysts are currently expecting. (Even though October saw an increase in desktop activity.)  And even though Google is well positioned for the mobile transition w/their android network, the mobile ad rates are simply not yet high enough for that transition.

Google needs to utilize all possibilities to increase revenue and earnings. Now that Google has developed a brand name with the Nexus line, Google will need to shift strategies from a no-profit device to a for-profit device. (If ever so gradually.)  The level of demand they are seeing for the Nexus 4 and 7, means they can charge high prices.  This also means Google can cut even more expenses from Motorola. (There should not be such redundancies within Google. They need to streamline.)

My current fear with Google going forward is that they will be a habitual under performer during their quarterly releases until they streamline their hardware efforts or mobile ad rates rise.

Until the above changes are made, I am uncomfortable with Google having a multiple higher than 22. With that being said, Google has shown their lack of stupidity and ability to rapidly adjust. They will eventually streamline their hardware operations. Until then, I am more comfortable entering GOOG when it has a trailing PE of 19 or below.

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