What's Ailing Google's Stock Price?

Google was down big yesterday and is now retesting its lows from earlier this year.


I’ve been trading Google a bit this year and bought it around $500 and sold it around $560. Now with the stock approaching $400, I am thinking about making a bigger bet on it.

But it bugs me that the stock has been so weak on so little volume lately. It’s like nobody on wall street cares about Google anymore. At the same time, Google is acting very strategically toward one of the most important markets (information technology) in the world economy. As Umair Hague puts it:

that’s exactly what Google’s doing with Chrome – and then it’s using
those shared resources to create new markets, instead of contest old,
tapped-out ones, and build flexible, powerful edge competencies,
instead of rigid, stifling core competencies. Those are next-gen
economics – and it is those new economics that can only be tapped by a
better kind of business.

Google is a better kind of business, one that has extremely high operating leverage and one that operates a platform that others can build on top of. I find it a very attractive company to own.

And then there’s the issue of valuation. Last quarter Google had $1.7bn of operating cash flow. That’s ~$7bn per year. So Google trades at about 18-19x cash flow right now. That’s a big multiple of cash flow, but it’s not a ridiculous multiple. It all depends on what you think cash flow will grow at in the coming years. Given how many businesses that Google owns that it has not monetized in the least, I think there’s a lot of cash flow growth potential out there.

Alley Insider points to the fact that the government is readying an anti-trust case against Google and that would certainly be a negative for the stock. But I just can’t imagine the US government going after Google right now. It seems to me more of a threat to keep Yahoo!’s search traffic and inventory out of Google’s hands.

So my gut tells me that $400 is a good entry point for this stock and I am noodling about making a bigger bet on the stock if it gets there. It’s certainly not a momentum investor’s trade, but that’s not me anyway.

I’ll keep you all posted as I think this one through.

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