The lackluster performance of Google stock has been a common theme for much of the last 12 months, as it has declined 4% compared to the S&P 500’s 11% gain in the same time frame. To be sure, investors have reason to be less than enthusiastic about the search giant right now, but unsurprisingly, analysts are trying to convince them otherwise.
Why investors are anti-Google
As analysts at Canaccord Genuity point out, the underperformance of Google stock stands in stark contrast to the outperformance of some of its internet peers. For example, Facebook shares have climbed 27% in the last 12 months, while Amazon has risen 39%. Even Twitter, which has slumped quite a bit recently, is still up 19% for the last 12 months.
Analyst Michael Graham and his team name four main reasons they think investors are just done with Google, at least for now. Perhaps the biggest reason given by most is the fact that growth in search advertising, Google’s core business, has probably hit its top. Another worrying trend is that Facebook and other providers of social advertising will probably keep stealing digital ad share from Google. The Canaccord Genuity team agrees with both of these assessments.
However, they disagree with the other two. One is the belief that Google doesn’t have many opportunities to offset the deceleration in search growth. The other is that Google’s multiple is exactly where it ought to be because of the deceleration in growth.
Why investors should like Google
Canaccord Genuity continues to rate Google as a Buy with a $650 per share price target. The firm’s analysts see big opportunities in You Tube, Google Play and future advertising technology. In 2012, they estimate those three categories at about 13% of Google’s total gross revenue, but by 2018, they expect them to be about 34%. They especially like Google Play’s prospects, which they expect to grow by more than 50% per year over the next couple of years. They’re projecting a more than 25% growth rate for YouTube as well.
When expecting such healthy growth rates for these three areas, the analysts point out that Google’s revenue growth should be in the teens, at least through 2018. That’s despite a growth rate for the company’s core search business of only about 6% that year.
Hints from history
And what of Google’s multiple? The Canaccord Genuity team made the case for why the history of other tech firms’ multiples suggests the search giant’s multiple will grow in the future. Microsoft, Intel, IBM, Hewlett-Packard and others saw periods of deceleration in revenue, but their multiples still expanded.
For example, Microsoft’s average price to earnings multiple was about 24 times for 14 years even though it saw only about 10% growth on the top line during that time. Google’s multiple is lower, and its growth is expected to be greater than that.
Charts are courtesy Canaccord Genuity.
As of this writing, Class A shares of Google were up 0.22% to $555.49 per share.