Publish date:

Google Stock Stuck in Neutral

The disconnect between strong growth and a stagnant stock gives investors pause.

As a company,

Google

(GOOG) - Get Alphabet Inc. Class C Report

prides itself on doing things differently. But when it comes to its stock, Google should be embarrassed about its conspicuousness.

Taking into account its expected rate of growth, Google's stock price multiple is trading at a steep discount. And as the company has continued to deliver stronger earnings -- while its shares remain stagnant -- this compressed ratio has only become more glaring.

Shares of Google closed trading Wednesday at $465.78, near levels they first saw in January 2006. Back then, the company reported quarterly adjusted earnings of $1.54 a share. In its latest quarter this year, Google announced earnings per share of $3.68 -- almost two and a half times as much.

However, all the major indices -- the

S&P 500

,

Dow Jones Industrial Average

, and the

Nasdaq

-- have outpaced Google shares over that period.

Google's price to earnings to growth ratio, meanwhile, is only 1.1 -- the lowest by a wide margin for a big-cap Internet stock. Indeed, the second-lowest --

eBay

(EBAY) - Get eBay Inc. Report

-- has a PEG of 1.26, and that's despite widespread investor concerns that eBay's core auction platform is aging and the avenue for future growth is anything but certain.

It's not just that Google is simply bigger than eBay to begin with, either.

Microsoft

(MSFT) - Get Microsoft Corporation (MSFT) Report

, at $290 billion and nearly twice the market cap of Google, still commands a PEG ratio of 1.5. Even with repeated failures to make a dent in the online ad business -- and amid growing fears about its future growth -- Microsoft's stock has outpaced Google over the last year.

While you wouldn't know it by looking at the stock's recent performance, Google continues to be the darling of Wall Street analysts and investors alike.

According to Thomson Financial/FirstCall, 35 analysts recommend buying the stock while only two recommend selling it. With a median price target of $600, half the analysts covering Google think the company is trading about 28% below its value.

eBay, the second-most undervalued big-cap Internet name by this measure, is trading only 11% below its median price target.

TheStreet Recommends

Some noted portfolio managers also seem to see a bargain in Google shares. "There is no company in the market that we can find with a faster top-line growth rate, a higher profit margin, a dominant position like Google enjoys, but with a lower price-earnings multiple," Legg Mason value fund manager Bill Miller told

Kiplinger's

in April.

Miller also pointed out that Google commands a lower P/E ratio than

Starbucks

(SBUX) - Get Starbucks Corporation Report

, although Google is growing twice as fast as the coffee chain. (It's worth noting that Miller was long a believer in

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

-- a stock that was long forgotten about by most investors until its massive run-up in the wake of an unexpectedly strong quarter.)

Of course, Google isn't some massively profitable-but-obscure technology play that's only loved by a few Wall Street insiders. The company is among the best known in the world. Indeed, research released last week by brand consultancy Millward Brown ranked Google as the most powerful brand in the world, ahead of companies like even

Coca Cola

(KO) - Get Coca-Cola Company Report

and

Disney

(DIS) - Get Walt Disney Company Report

. (Both command higher PEG ratios, by the way.)

Apple

(AAPL) - Get Apple Inc. (AAPL) Report

, the other high-profile and widely loved tech company, gets a respectable PEG of 1.4.

Google's maverick ways as a company may well be related to its idiosyncratic performance as a stock. In its own bid to avoid short-term pressures, the search giant refuses to provide quarterly guidance, for example. This has made the company's financials difficult to forecast -- yet another complication for a company already in a rapidly changing industry investors often have trouble understanding.

Then there's Google's overall strategy, which has also been more unusual and ambitious than that of most other companies. Rather than tackle one market at a time and give investors fresh sources of revenue in neat chunks, Google has instead jumped into markets ranging from print and radio to mobile and video advertising.

The company's end goal is to offer advertisers a one-stop shop to place ads across mediums -- a move with enormous returns if it pays off. Similar to how it took its time finding a way to make money off search ads, Google seems in no hurry to raise its game and engulf other forms of advertising.

In the meantime, investors are left waiting for a clearer picture of how Google is fairing. When it's clear that Google's grand plan is panning out, investors may rush to on board and send the stock shooting higher again.

However, if Google's stock keeps trading sideways much longer, investors will end up abandoning it for a quicker payoff -- just like they would any other.