6 Questions for Long Term Google Investors

The market decline of the past 4 months has been especially ferocious and pervasive that, quite honestly, it seems to have been around for far more than merely 4 months. So does this decline qualify as a bear market?

Bear markets, at least as I denote them, occur rarely. Whereas market up-trends tend to be typical, usual, enduring, and the investors' mindset, general market down trends (bear markets) tend to be rare largely because no market is monolithic. Only rarely do all groups and sectors trend down; some group(s) somewhere bucks the trend. The trouble, for the market observer reliant on general market averages for directional cues, is whether the rising group or sector is a component of the market average or index; if not, then that group's rising prices provide no support to a declining market.

Many articles and commentaries circulate today that serve to frighten the bejeezus out of each of us; for example, this excellent Atlantic Monthly article by James Fallows, which is intelligent, well written... and disconcerting. Needless to say, there are others of its ilk. To further mine that vein, market action the past several months reveals an acceleration both of the down trend of the US$ and the up trends of gold, oil, and most commodities. Equities have been caught in the crossfire, and thus sold for a variety of reasons, including the (desperate) need for liquidity and the fear that today's price will be higher than tomorrow's price.

Which qualifies as only one reason I believe faith to be a prerequisite to invest long term. (That is, to identify and invest in a leading company that offers the best product or service in a growing industry.) The investor requires faith because, in the final analysis, a stock is little more than a piece of paper -- unlike (corporate) bonds, which represent a senior claim on a company's revenues. And do not forget that investment bankers create new pieces of such paper (shares of equity) seemingly every day.

In one sense, stocks qualify as a giant confidence game; as long as we believe in the system, the game continues. Of course, investing is not really a con game, but the suspension of disbelief required to believe the markets', and the economy's, structure will not implode also qualifies as a form of faith. In addition, the investor relies on faith to carry him through the ubiquitous cloud of unknowing and uncertainty, to buy when other investors sell, to acknowledge the possibility of follow-on short term financial pain after he or she invests, and the vagaries of time. Lots of time. Time might heal all wounds, but it also creates its own uncertainty; really, who knows what the future will bring, whether fashions, stock prices, or Presidential elections.

Consider Google (GOOG). Pretty much the market leader straight out of the chute (post-IPO), the company and its shares became Wall Street's darling -- until the shares peaked in November 2007; its $300 decline since then erased its gains from October 2006. In doing so, its sudden decline breached crucial levels of support. Or did it?

[click on chart to enlarge]

Negative articles proliferate about Google as well; one commentator suggests the shares now could plummet as low as $350. He certainly hopes such an event occurs; it would allow him the opportunity to cover his short position for a 100% loss (yes, he has been recommending investors short GOOG all the way up). After looking at the chart above, ask yourself these questions:

1) Is Google today the same company it was 18 months ago?
2) Is Google a better company today than 18 months ago?
3) Are Google's revenues and earnings the same level, or even less, than 18 months ago?
4) Is Google a flash in the pan company; here today, gone tomorrow?
5) Will Google continue to grow as a company, and as an enterprise?
6) Is today's price, recent ferocious down trend notwithstanding, a fair price for investors?

Long term investors always ask questions of this type; other questions, whether re company fundamentals, stock valuation, or stock chart analysis are all ephemeral. For example, all trends die, which is the precise purpose to identify and delineate trend lines (those moments provide inflection points). And, yet, despite the presumed horrid news ("Google shares are collapsing! I told you the company is another dot bomb..."), the company itself remains. Throughout its 40 month bull market straight out of the chute, many investors hoped for a correction in Google's price and value that would allow them the opportunity to invest inexpensively, even cheaply. So here is the opportunity you hoped for, handed to you on a silver platter, tarnished though it might appear. Will you seize the moment?

Yes, it is difficult to catch a falling safe, and Google's plummet earthward has been frightening. This recent down trend could continue. But will it? You buy at $420, and GOOG continues its plummet to $350 -- what then? Is a deeper decline to $350 from $420 truly consequential when the decline began at $750? How low is low, before a countervening trend occurs? Certainly, the more bearish yammering about GOOG, the better I feel.

Those last comments might seem, at first blush, simple, even simplistic; I argue them to be elegant. We each, as humans, have a preference to prefer the complex answer to the simple; complexity, as explanation, makes nothing more transparent; it only obfuscates. Moreover, I believe complexity in the service of explanation to be the work of charlatans. Probably no surprise that I seek the elegant answer in everything.

Which includes technical analysis, a valuable tool to identify reversals and trends. TA certainly is not for everyone; heck, most investors use it incorrectly, and then deride it when the 'answers' gleaned from their faulty analysis prove wrong. That comment aside, I note various technical measures suggest GOOG's decline could have hit bottom at $413, although a secondary test in the days and weeks ahead would not be uncommon. For the nonce, I seek chart clues that $413 will prove to be the low trade of this correction. No prediction, but, as an investor, I like Google at $420. Google, however, is not alone out there, screaming, "Buy me... steal me!"

Despite what you might read elsewhere, positive investment returns can be made in all market environments, although the requirement for extra prudence arises during severe declines.

Full Disclosure: Long Google.

Comments

[jimmyt]

Google - already a verb, and central to my life on the web. I think our children and/or grandchildren will ask us in wonder "you mean you SOLD google when it was only 7 years old?" Still, the price of these things can get ahead of themselves, and GOOG is no different. I have traded the stock (mostly for gains) on the way down, and I am long at about $440. I like the idea that they hire the smartest people and are not afraid to let them invent new things. I think the search franchise has room to grow, given that online continues to take share from other media. All things considered, I see more upside opp than downside risk for this. Your thoughts?

[antonhak]

Thorough article, but forgets shareprice in this business is mainly formed by psychology. Will growthrates keep rocketing skyhigh, will marketshare increase towards max-achievable? Of course not, all fast growth naturally slows down asymptotically. Only substantially more relative earnings will raise the shares. That, I think, will take a year or two. So get out and make your profit elsewhere until around March 2009, Google can be a sensational buy at $300 or so.

[AmesTiedeman]

The days of GOOG growing at 40% are over. They are already talking about layoffs. GOOG is a super good company. The problem is the expectations that are built into the stock are simply too high. Consumer confidence has hit a 16 year low. This does not bode well for the mighty Goog. Will they survive and thrive? Of course. They will simply grow their sales and earnings per share at a slower clip.

[conrad45]

He is undoubtedly correct. At this point in time and at todays closing price of 437, Google is a long term play. We never buy at the very bottom and later sell at the very top. It's very difficult. So you buy on dips and later sell higher. And to do this, you have got to have a plan. The plan is incremental investing at dips. You buy today or tomorrow after a sell off. Hey, if today wasn't a sell off (friday, 03/14/08) then we are in for some scary times. Then you buy the next dip and so on until you build a nice position. We are at or near a bottom as evidenced at increasing volatility, increasing volume and hugh points down and up. We are at or near capitulation folks.
Then - bingo, when it goes up, up, up - you start taking profits a little at a time. 437 is tomorrows 537 and tommorows 537 will eventually be 637 then 737 then 837 and so on. This is a monster stock. It is an institution man and the sooner people realize this, the sooner that they will reap returns. Now is the time to incrermentally buy - the sky is the limit.

[chad cowan]

I agree hat Google is a great tech company. In fact they are the best at what they do. However, I think Mr. Gordon is forgetting that google has to operate in an environment where its clients/customers are experiencing a slowdown in business (and chances are they will continue to do so as the rcession deepens) Isn't this likely to negatively impact google's earnings/growth prospects? While this tree remains healthy the falling trees that surround it in the forest threaten to topple it. One ought to consider these things before we begin to scream BARGAIN!!!

[tessant]

I am not a google perma-bull, but its very simple. At the rate they are going, they will be around for a while and be at the top of the hill.

Scott
growthportfolio
"the facebook of investing"

[blah-blah]

Decelerated growth is not the end of the world, they are just no longer invincible. Great company, great start - one trick pony just needs to diversify beyond free wordpad. With the hype gone, clarity returns.

One thing is for certain, hitting $750 again will take a lot longer this time .

[turneight]

this is a badly written article and its premise is wrong. Google the company is actually very flawed and its shares are following suit. Google has its fingers in too many things (AOL, Wireless, laying cable across the Pacific) and its going to fail at most of those things. And its mobile SDK (what is it called again???) was launched by two guys in a boardroom. Compare that to Apple. iPhone SDK was downloaded by 100,000 people and over a million people watch the launch. Now thats powerful. Google is overpriced at these values, and its going to hit $285 a share this year. I found the article to be very boring and redundant. My recommendation is SELL GOOGLE and BUY APPLE.

[roger maxims]

Dear David

I hope you aren't using margin to buy GOOG.

It's a dotcom company you moron. Even taken as an advertising platform like the TV stations, it loses out for want of content (viz. sitcoms, talk shows, news and whatnot). How can Yellow Pages online be the most profitable company in the world?

No idiot, even on your scale, would pay to find out how much lava shot out of some volcano in 1999, right? Well of course you have your beautiful charts to back your story up, but this ain't "The Illustrated Edition of Alice in the Wonderland" I'm afraid.

[roger maxims]

Hey turneight, Apple is dreaming that

(1) people will pay to download music; and

(2) people will subscribe for an expensive cellular service

to make Apple rich.

I am glad you share the same dream. Good night.

[hook]

psychologically speaking the fact that you even took the time to write such an elegant article about your beloved baby Google probably means it hasn't bottomed yet. You are, after all, long, and your article is nothing more than a well disguised plug for your long. Let me know when you sell and I'll think about buying...

[why notSBLK?]

An interesting, provocative article. Thanks for reminding us about the "faith" part of our financial system. Ultimately, anymore, the worth of many of these big companies are just 0's or 1's in some big computer somewhere and only worth something if we "believe". Especially companies like GOOG, AAPL, etc. that pile up lots of cash and insist on never paying their shareholders dividends.
Why not MO, GE, DSX, or even SBLK currently paying 12.7%? A real $ payout is far better than "faith", especially in today's economy.

[buyforeclosures]

Yeah..it sounds more like a rebuttal to the guy shorting Google than anything else. Sure Goog is a very good company as is Bidu. BUT there are a lot of very good companys that are tanking right now. This is a LONG market. If I am going to go long I am going to buy foreclosures as I know they will at least double down the road

[Dana Cole]

I have no idea where Google is going. All I know is that I use it about 30-50 times a day.

[GKM]

Wow there is a lot of bad investment advice in this article. I can only hope the author has been lucky in his investments as his wisdom is left wanting.

I'll give him a bit of investment advice. That $350 is the target for Google at least for a pop. That happens to be right where that analyst called for it and I'll also bet that the analyst has made a great deal of money on the way down. I'm sure he'll be looking for the author's shares there.

[Sleuth]

The Barron's analyst who is calling Google's next stop at $350 is the same one who was yelling to short Google at $450 then at $550 then at 700 for the last 12 months. Had you trusted him, you would have sold Google at $450 or so a year ago. Of course he back and blowing his horn again because finally Google is down for a change.
Now that EU has finally cleared the merger of Google and Double Click, watch the march of Google toward $550 in the next nine to 12 months!

[Swampthing]

Since this is a long term article on Google, my question is where do they find themselves in the long run with mobile?

They are looking into the 700 spectrum bid along with other companies. The rumor is that they are building a mobile device, the gPhone. They are working with QR codes on print ads.

There is a company once proclaimed to be the next Google for mobile as Google was for the PC. Why?

What about one click to content. What about saying a keyword into the mobile device and having instant information sent to the mobile device. What about clicking on physical world objects? What about being able to click on logos, trademarks, keywords (WHICH IS GOOGLE'S MAIN SOURCE OF INCOME AND PC SEARCHES AND MADE FROM), 1D barcodes (EAN & UPC), 2D barcodes (QR, data matrix, Aztec, Maxi), billboards, slogans, etc.,and RFID.

WHAT IF GOOGLE DOES NOT OWN THE IP FOR MOBILE NAVIGATION AND ONE CLICK TO CONTENT?

Mobile is proclaimed to be the next avenue to the consumer.

My main question is, how is Google going to make mobile navigation easier for web users and consumers to get information fromthe physical world around them in one click?

Where is their future revenue stream coming from? What about Microsoft? What about Apple? What about Nokia? I rather not be a licensee for this 'MOBILE EASY BUTTON'. That is alot of missed revenue per click.

[dbmw6b]

Google will and should be dead money for the next 6 months. Move out, watch , then move back in.

[crowdofcheerleaders]

in the future, foreign nations will make their own googles in whatever form they like best. this company shares much the same delusion as AAPL: that their patents and core technology wont actually be outright stolen as our nation goes through the process of getting poorer.

[pseydocyst]

goog. What a stock.

It's amazing how much the insiders have made
on this stock. And the public is still buying this.
How is goog better than yhoo? Is the company
really making money? The website is dumb and a piece of crap and this company has a market cap of 137 B?? What a joke. Never in a hundred thousand years would I even touch this stock.
Keep hyping it Wallstreet. This one's going down.

[MO]

Online ad spending will triple in the next three years. Where is that money going? Yahoo? Microsoft? Some bumbling combination of the two? I don't think so. Google's a screamin buy here.

[steveballmer]

Do you really want to bet against Microsoft?

[dr.stew]

I like the idea that I can "Google" anything in just seconds, but in all the times I've been to Google, I have never paid anything for the use of the site. I often wondered where their income came from. No question, they do a wonderful service, and make the internet a lot user friendly. Sort of like "Aspirin". Both are wonder drugs for all times.

[roger maxims]

I agree entirely with pseydocyst. $137 billion is a hell lot of money for some company who is younger than your youngest brother and similarly doesn't know where its going when it grows up.

Exactly what asset book value has it, or ways to ensure its young talent doesn't walk away when the internet is no longer 'hip'? Better still, what KFC-style proprietary formulas will help Google survive competitors' challenge when the price to enter the market is a forgone MBA at Stanford?

[iThinkBig]

The company diversified into nanosolar energy. They are a sharp group of people, but watch the stock go down for now. Way down. I am in the ad space with big pharma, as about recession resistant as the drugs themselves. Spending down by 50% by clients with most putting budgets into second half. Next quarter will also feel a lot more like a depression then a recession for us guys in the advertising space, that's for sure.