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Don't Count Out Google the Innovator

BOSTON ( TheStreet) -- Internet-search leader Google (GOOG) will announce its second-quarter earnings today. Under the new leadership of co-founder Larry Page, who replaced Eric Schmidt as chief executive officer in January, the company has continued to innovate. It recently field-launched Google+, a social-networking platform designed to poach users from privately-held Facebook. Google+ received positive reviews and demand from test users.

Google's growth trajectory has remained impressive over the past three years. The company has grown sales and net income at annualized rates of 20% and 23% during that span. Its stock, however, is almost unchanged. Large-cap tech stocks, even those of darlings Google and Apple (AAPL - Get Report), have hit roadblocks, despite historically cheap valuations and outstanding prospects. Google is both cheap and safe. It trades at a forward earnings multiple of 14, a book value multiple of 3.6 and a cash flow multiple of 15, 53%, 56% and 29% industry discounts. The balance sheet holds $37 billion of cash and securities and just $3.2 billion of short-term debt.

Analysts forecast, on average, $7.83 of adjusted per-share earnings for the quarter, a 37% year-over-year increase. But, they expect sales to have declined 3.7% to $6.6 billion. Google shares have dropped 8.7% in 2011, lagging the Nasdaq, which has advanced 6.4%. Researchers remain decidedly bullish on Google, despite this poor showing. Currently, 35, or 83%, of analysts evaluating Google rank its stock "buy." The remaining seven rate it "hold." None advocate selling the stock. Jefferies (JEF) is the most optimistic forecaster on Wall Street, predicting that Google's stock will appreciate 48% to $800 over the next 12 months. Its investment thesis is multi-faceted.

Jefferies expects the second quarter to demonstrate growth, "reflecting healthy demand for search advertising and lower margins from increased investments. Litigation, anti-trust investigations and margin concerns may continue to weigh down the stock." This quarter, U.S. dollar weakness should offer a tailwind to results, as the greenback has fallen by 1.6%, sequentially, and more than 50% of Google's sales are now generated in foreign markets. Currency hedging may offset this potential profit boost. Interestingly, Jefferies, despite having the highest price target on Wall Street, expects revenue of $6.5 billion to miss consensus.

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