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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Comments (Archived):

  1. heuristocrat

    Your gut seems good on this Fred. I started nibbling a bit on the way down recently and think this is a long-term core holding which people will come back to. We’ve written quite a bit on Google already but I think $400 is reasonable level to step up. Our estimate of what we call Intrinsic Value (IV) is $800.

  2. andyswan

    I’m with you. Going in GOOG at some point this year…hopefully under $400.The better play would be to sell the OCT $400 puts for $16. If GOOG is under $400, you get the stock at $400 and keep your $16/share (so $384 net entry). If GOOG is over $400 on October expiration, you just keep the $16/share profit. It’s a pretty sweet way to enter into undervalued stocks slowly and once they hit the price you want.Also, it might be noted that many stock experts consider “low-volume dips” to be opportune times to enter a stock. The concept is that the volume is an indicator of how much enthusiasm there is for the price movement….so a low-volume dip might just indicate a lack of buyers in uncertain market conditions….rather than true conviction on the part of sellers wanting out of the individual stock at whatever price they can get.

    1. fredwilson

      Andy – this is why I am so bad at trading stocks. I would never think ofselling puts on the stock. But it does seem like a clever way to “nibble atthe stock”All that said, I think if I do this, I’ll take a certain amount of cash,split it into four traunches, and buy into this stock in four trades, placedover 3-6 months.fred

      1. Druce

        if you are committed to buying at a given price, and someone is willing to pay for an option to sell at that price, it’s free money… unless of course the stock gaps down and you could have bought lowerthe problem I have with that trade is the lot size – an option on 100 shares is a (potential ) $40,000 position.this shows how the high stock price can hamper liquidity and exacerbate volatility

      2. Quentin

        Is there any way to just cut out the middle man and just invest in andyswan? If so, I’m all in!Freakin rocks…..rocks

        1. andyswan

          Just make the check out to CASH 😉

  3. awilensky

    The market is acting as if earnings and P/E are no longer a true signal for owning the actual shares, whereas professional traders that know how to collar and hedge are making hay off the volatility.

  4. stone

    I’m also bad at trading stocks but good at watching them and I can tell you all that Google has acted very poorly over the past 24 months. Let’s put aside the fact that they’ve created almost *zero* shareholder value in real terms they just aren’t acting like a company that’s growing as fast as they are. I do not think the wacky side project helps their image much on Wall Street. We might be getting close to a time when it may make sense for Google to straighten out a little bit, just enough to calm the nerves of investors who don’t like to hear about space projects coming from on an online ad company.

  5. terra210

    The G-Phone and Android, is likely to increase the value of GOOG shares tremendously. I have a hard time seeing how the government would want to bring an anti-trust case against GOOG with an arm of the US government being one of their main investors, (the CIA). it just doesn’t make sense to me. But will they have to do so? Or is GOOG much too smart, and so learned from MSFTs mistakes regarding these issues? My guess would be the latter.

    1. Jim Kerr

      This would be the case if 1) Google was making the phones, which they are not or 2) Google was getting money to license the OS, which they probably are, but not to the extent they could if it weren’t open source.To make money with Android, Google has to either make phones like Apple or Nokia or find a way to build monetization into the platform. They may do that with integrated search, POI Adwords, and similar, but that market isn’t a given, and too much integration will get them into trouble with regulators, especially if someone other than McCain wins the White House.

  6. Bryan

    I’m with you Fred. I’ve been looking for the bottom for some time and really didn’t expect it to go this far. Google is relentless in their release of new products and dominating market share and I expect continued growth. As a person that invests more for the longer term the current price is looking quite attractive.

  7. Damon

    Google is tough to invest in because it’s price has generally diverged from it’s expected cash flows. People expect big things, yet they can’t really define them or just how big they’ll be. I stay away from it for that reason. There are too many sanely priced (even cheap) public companies that you can get a great return on to mess around with this sort of speculation.

  8. Bill Davenport

    I also like GOOG at these levels. Seems like a great GARP (Growth at a reasonable price) holding and seems like downside is 10% while upside even in a 1 – 2 year period is 20% plus. I suspect they are not getting any credit for Android given the success of iPhone. As an aside, as an iPhone user I have a hard time imagining they’re going to have a better user experience so I’m a skeptic ther too. Anyway, I also suspect they’re not getting much credit for Chrome which I have been using and really enjoying. It does seem to be quite a bit faster and I like the nuances of their tab implementation. More generally speaking my guess is that the market doesn’t see where the growth is going to be coming from and thus we see multiple compression.A bunch of stuff on this as well at SAI.http://www.alleyinsider.com

    1. Bill Davenport

      Peter Thiel also feels GOOG undervaluedhttp://news.cnet.com/8301-1…

  9. Jamie Lin

    I also feel Google is a company to be invested in in the long run. I love their strategies, their culture and willingness to challenge how business is done traditionally.But financially and operationally, I’m somewhat concerned. Most with their inability to grow cashflow/net income faster than revenue like they used to do prior to 2007. They should still be gaining economies of scale for their size, which their growing gross margin can attest to — meaning their not done with picking low hanging fruits yet. Plus, in 2007, they cut their CapEx growth down to 26%, which has historically been 100+%. (It is even lower in trailing 12 months — 15%.) Even though Google is more of a software as a platform company, this trend still worries me as their long term competency can be hurt by lower % invested in infrastructure.So I think goog is down for the year as people get nervous seeing it reporting low double digit/near single digit growth. (oh! the glory day is over!) but whether or not it is time to buy in for the long run, i think there is still risks. not to mention the pending DOJ investigation. but, where there is risk, there is reward to be earned, right? the more i study stock market, the more it feels like a casino to me! ha!ps. fred you’re truly a vc investor! even with public stocks, you’re still thinking to do tranches! =)

  10. anton

    Google lovers want to talk fundamentals of the biz and future setup and Wall Street wants to know why they started a space program. You can study the tech echo-chamber and get excited about entering Google here but the market movers are not with you yet. If you’re willing to “feel the pain” down into the 300s, you might get rewarded. If you’re the type who gets shaken out of a position after a 10% move down then this isn’t your stock.As an aside, Google’s “let them eat cake”/”you dont get it” attitude toward Street is not helping. It makes them look immature and naive.Good luck — in this market you’ll need it.

    1. fredwilson

      That’s great insight.If and when I start buying, I’ll average into the stock in probably four trades over a 3-6 month period so I’m not particularly concerned if it goes down or up. this would be a buy and hold to a target price. I need to develop that target price a bit more.

      1. research

        Munster from PJ says 785 in a year…. buy and let it double, then sell a quarter of it… be an investor, not a trader.

      2. Christian Cadeo

        Fred,Do you have a target price to the downside to unload?

        1. fredwilson

          Not really. I’d buy more if it went down.

  11. RacerRick

    I think if it gets closer to $400, it’s a steal. I doubled down at $470 after making an initial investment at $510.None of that chrome stuff (or android) is going to help the stock price within the next 2 years. The only thing that helps the stock price right now is more folks buying more adwords. I’ll sell GOOG after…> I see plumblers taking Adwords in Milwaukee. I check every month.>My wife’s large CPG company finally starts buying Adwords. They’ve been contemplating it for a year.

  12. mattmaroon

    Part of what’s ailing their stock price is their stock price. They should go ahead and 10:1 split like a normal company. As Mark Cuban says, it’s all baseball cards at this point, and there’s more than 10x as much demand for $40 baseball cards as there is for $400.Mostly though it’s probably because growth in their core business is slowing, and doesn’t show any signs of stopping. Their search growth in the developed world isn’t that far from the 100% ceiling, and they’re making little to no progress in China. Ad blockers are probably growing faster than DoubleClick and AdSense combined.They’re making moves at enterprise, but they seem to be doing it not with intent to capitalize but instead to make Microsoft lose money. The arms race in the free web-based productivity suites will ensure that nobody ever makes a dime off of them.I don’t know if Google is undervalued at $400, but they were greatly overvalued at $700, so it’s at least mostly a correction. I might consider buying them anyway though because I think Android is going to be game-changing in the way that everyone thought the iPhone would, and they obviously stand to benefit from it.

    1. Christian Cadeo

      As much as I hate to agree, you are right. By splitting they would increase volume as well as dumb money who assume that a lower price point means a cheaper stock

  13. Jim Kerr

    Fred,I don’t know much about the stock market, but I can say that there are probably several things at play here. One is that it appears that people are betting that Google is going to lose their billion dollar lawsuit to Viacom, and that this will presage a big problem with Youtube. The second is that Google, despite all the love from the tech side, is really well behind Yahoo in just about every category Google dabbles in. Gmail? Yahoo beats them. Picasa? Flickr beats them. You would be hard-pressed to find a certifiable big win revenue producer for Google outside of search. You can most likely add Chrome to that list.I’m guessing that kind of shotgun approach to R&D is flying about as well with Wall Street as it is with consumers… It’s interesting and all, and they have some marketshare and modest momentum, but overall, they aren’t category leaders anywhere other than search and video via Youtube (and we all have seen the difficulty Youtube is having monetizing its platform).I’m a huge fan of the potential of Android, but more because it’s open source and Google will put money behind it more than it is from “Google.” With what Nokia is doing with Symbian and QT, it is possible that Google can even become a mobile phone OS leader and still not make money from it as the OS will become a commodity and the real money is in the phones. In this scenario, Nokia has the right idea.I certainly get that Google may lose money on all these initiatives and do well if they lead to a greater increase in their Adwords and Search revenue based on the platforms, but that still remains to be seen if it is viable.

  14. yan_i

    This blog post is one way to increase the odds of your investment being successful 🙂

  15. Guest

    Fred,I might not be a great start up manager but I use to run an option trading operation for many years.1) selling puts is not a great idea if you expect a rebound. You will pocket the premium but miss the whole upside. You would not bet on the direction only, but on direction + timing. Good luck.2) the multiple is linked to expected future earnings. Expected future earnings are partly linked to the reputation of the firm. Google’s reputation is shifting. Writing “don’t be evil” does not seem to be sufficient anymore to appear cool when your business basis is storing personal preferences.3) I wrote more on my blog this morning (http://camblain.over-blog.c…. As a VC, your fate is already linked to Tech share prices anyway. You do not need to double up and fall in the category of people who do not believe in diversification: ” I work in the sector, diversification is for amateurs”. not you.SincerelyJerome Camblain

  16. CoryS

    Fred,Fundamentals = GOOG is in the advertising business, they didn’t get a piece of the Olympics and likely won’t see much in the way of the presidential election which are the only two spending drivers for the year. Step to the corporate view and the only profit driver is from ad revenues (as cool as Chrome is, it doesn’t change profit streams). Analysts model cash flow, and the ad environment is terrible.As an aside, I’m on the record earlier this year:http://backseatmarketers.co

  17. Gopi

    Fred, here do you think the immediate growth will come from??. (Apart from future potentials like Android or Video monetization which may take years!)1, Not from gaining search market share – It has only 10-20 points to gain in the US market, most oversees market is tapped out (90% share in most markets). Also the total search market pie is not growing fast.2, Not much left to squeeze from eCPM optimization – Remember most of the growth in the last 2 years came from this sort of revenue optimization (via adword quality score) than organic traffic growth. IMO, there is not much left to extract in this areaThe only area left for immediate growth is display ads – but unlike adwords this is a low margin business (like adsense) so it has little effect in the net cash flow.

    1. fredwilson

      I am thinking about areas like local/maps and google apps

      1. terra210

        I agree that GOOGs position in the new web-based operating system for serving apps is well positioned.

  18. James Adams

    I wouldn’t say they look “cheap” at the current price given nearly all their revenue comes from advertising and the global economy is looking rather dodgy. Their range of projects and products is impressive strategically but they’re some way off earning revenue and traders are notoriously short sighted with things like this.Given their business they’ll be heavily effected by how much money is sloshing around the economy. If there is a contraction in the money supply and a deflationary period they’re going to suffer in the short/medium term like nearly every other company. So it basically comes down to what you think will happen in the US/Global economy over the next 2 years.

  19. Angela Hey

    Less free food for Googlers and Yahoo!’s mobile platform might scare off some Investors in GOOG

  20. mm

    investors are concerns about risks to 3Q estimates due to the strengthening dollar. it’s short-sided selling, something that has become the most important driver of stock prices of late

  21. jbenz

    Google just hit $380. What’s your call?

    1. fredwilson

      I bought some today and will buy more if it keeps going lower. I am starting to accumulate a position

  22. stock4us

    Now that the price is 350, what are your thoughts?

    1. fredwilson

      I have to buy moreThat’s my game plan

  23. siddiq

    nice!! i m soo intrested in this i m high school student sopmore and in our consumer class we were talking about stocks! i really got into it.

  24. Joe

    It’s the 18th of Nov and now Google stock is trading at $290.00 a share! I feel sorry for the people who read this article and bought in at $400.00 a share. Hahaha!

    1. fredwilson

      I am continuing to buy itWell see in a few years about the wisdom of that

  25. fredwilson

    I would look to $600 to start peeling off some and maybe $800 to $1000 tounload it allIt could, of course, take years to reach those levels