Google stock is a screaming buy for equity analysts. Google’s stock has outperformed the stock market price for five years running. It added 5% year to date while the SPDR S&P 500 ETF (SPY), idled flat, according to Morningstar. The search-engine behemoth soared 43% in the past 12 months. It has returned an average of 27% annualized over the past three years and 29% on average over the past five years. By contrast, the SPDR S&P 500 rose 20% in the past year and added an average of 15% and 22% annualized over the past three and five years, respectively.
Shares of the company, valued at $394 billion, trade currently at price-to-earnings ratio of 33. That is high compared to its five-year average P/E ratio of 25 and the S&P 500, currently trading at 18 times earnings. However, Google shares are cheap relative to its industry average P/E ratio of 42. Google trades at 5 times book value and seven times sales, which are in line with their five-year averages. Google’s P/B and P/S ratios are higher than the S&P 500’s ratios of 3 and 2, respectively. However they are low relative to the industry’s average P/B ratio of 6 and P/S ratio of 8.
Google is on deck to issue a dividend April 3 and release first-quarter corporate performance results April 14. Google plans to issue shares of Class C stock as a dividend to shareholders on file as of March 27. The new shares will start trading April 3. The Class A, trading under a new ticker GOOGL, will have one vote each. Class C, trading under GOOG, will have no voting power. Google’s founders are splitting the stock to help them keep voting power. All future shares will be issued as Class C and have no voting rights.
Bank of America Merrill Lynch analysts rate Google stock a buy with a $1,380 a share price target. That represents an 18% increase over Friday’s close at $1,172.80 a share. They believe Google’s Class A and C shares will trade close in value as Google will compensate investors for any difference in share prices.
“Google has traded at 8 to 19 times forward P/E over the last five years, and we believe Google’s multiple can expand if the company’s revenue growth re-accelerates on new ad products and easier year over year comparisons,” Justin Post and Joyce Tran, research analysts at BofA Merrill, wrote in a client note March 13. “Google has incremental opportunities in mobile advertising, display advertising, YouTube monetization and mobile hardware.”
Google stock is a screaming buy for the majority of equity analysts covering the stock while a minority rate it hold. S&P Capital IQ rates Google hold with a $1,300 a share price target. Analyst Scott Kessler forecasts 2014 revenue will increase 17% year over year and that 2015 revenue will jump 18% year over year. The estimates account for the $12.5 billion takeover of Motorola Mobility in May 2012. The estimates do not reflect the pending sale of Motorola announced in January this year to Chinese hardware make Lenovo for $2.9 billion.
“We had been skeptical about the Motorola purchase,” Kessler wrote in a client note dated March 15. “We see regulatory challenges to consummating the deal, but believe it would be fundamentally positive for Google. Nonetheless, we see healthy growth from Google’s namesake business unit, with opportunities related to mobile, video and international. Concerns related to mobile advertising pricing persist.”
Post and Tran of BoA Merrill note the following investing risks:
“1) PC search revenue decelerates faster than anticipated, 2) mobile transition could pressure Google’s near-term revenue growth and margin profile, 3) revenue growth pressure from competitor initiatives, 4) saturation of key markets given Google’s dominant market share, 5) consumer cyclicality with general exposure to all economic verticals and 6) regulatory overhang. The stock has been subject to heavy volatility in the past based on revenue growth and margin trends and this volatility could increase due to economic uncertainty.”
For the most part, Google stock is a screaming buy for equity analysts. Among 46 analysts polled by Thomson Reuters, 17 rate Google a buy, 18 rate it outperform and 11 rate it hold. No one currently gives it an underperform or sell rating.
By Trang Ho
Bank of America Merrill Lynch (report)
S&P Capital IQ (report)