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Saturday, October 19, 2013

$goog - everyone is a bull

Everyone is now a bull. Most are recycling the same thesis: Paid Clicks are growing fast, off-setting the decline in CPC. 

Below is a historic look at Paid Clicks and CPC.

Paid Clicks look to have decent growth, but nothing near the level of 2012. CPC are still in the same decline since 2011. 

In my most humblist of opinions, there is no awesome re-acceleration in Paid Clicks that merit a multiple expanding price action. Keeping in mind, these are the wildy referenced metric that added over $35 Billion in value.  At most, the gradual increase in Paid Clicks merits justifying the already elevated multiple existent prior to Friday.  And despite the gradual rise in Paid Clicks, there was still a gradual increase in declining CPC.

During the 2012 acceleration of Paid Clicks, GOOG saw a 100 point move, but the move took about a month, and prior to July 2012, the street gave a rats ass about +30% Paid Click growth. (I remember very vividly because I was actively criticizing the street for the lack of appreciation.) In fact the street was trading GOOG at a recession-level discounted multiple despite the growth. 

(The chart does not reflect Friday's expansion.)

So, now that the street wants to use 'Paid Clicks' as the justification for multiple expansion, I call bullshit.  The growth is not as fast as 2012, and the market capitalization is too large to justify a trailing PE of 28-30.

Looking at the above, Fridays move was a bit perplexing. Along with the lack of analysts questioning the move. Adding to the confusion was the low tax rate. Over the past year, Google's tax rate has been jumpy. So much so, I keep wondering why analysts dont question it.  Q3 tax rate was the 2nd lowest in three years. (Q1 saw an awesomely low 8% rate. wtf.)

After plotting the tax rates, the quality of earnings for Q1 and Q3 really stick out. To add to my discomfort, while Q2 had a historically normal tax rate, Google met earnings expectation through a one time addtion from Discontinued Operations.

There are serious questions of earnings quality for each quarter in 2013.

Google is by far the king of online ads. I love their services, and use most of them. They will definitly benefit as more and more of the content business goes online. But I hate it when Eric Schmidt talks because he says stupid, blatantly factually incorrect things. I hate it when Google's management acts hypocritical. I hate the way the company has morphed into a competitor to so many sectors instead of a partner. 

As a company I think they deserve a premium multiple. But the only time a +$200billion Market Capitalization company has held a near 30 trailing mutiple is during times of euphoria.

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