Are Google Shares Cheap at $300?

SAN FRANCISCO -- Google's ( GOOG) strength is no match for the economy's weakness.

The once-unshakeable Internet kingpin now sees its shares trading at a three-year low, undercut by recent analysts' reports that predict a slowdown in the fourth quarter exacerbated by continued erosion in consumer spending.

But with its stock now scraping the $300 level after plunging 15% in just the last five trading sessions, some value hunters see an attractive place to wait out the worst.

On Monday, Doug Anmuth of Barclays took down his financial estimates for the company, expecting Google's revenue in the fourth quarter to be flat sequentially. Goldman Sachs analyst James Mitchell also trimmed his forecast and now anticipates revenue will grow by only 1% sequentially instead of his previous forecast calling for a 4% increase.

Google's shares have sunk 57% to $311.46 in the past 12 months, and although the company topped analysts' third-quarter estimates last month under a similarly pessimistic atmosphere, it's unclear whether it can pull off a repeat performance.

"Our checks with SEMs (search engine marketers) over the last several days, along with recent commentary from companies like IAC/InterActive Corp ( IACI) and InfoSpace ( INSP), lead us to believe that the weaker retail and macro environment is finally catching up with Google and search," Anmuth wrote in his research.

"Our SEM checks have been mixed to negative, but indicate overall that the clear slowdown in consumer buying activity has impacted both the number of paid clicks and cost-per-click."

InfoSpace, which develops metasearch products, last week offered a revenue forecast below Wall Street estimates, while IAC, which owns Ask.com, also issued cautious views for the fourth quarter, noting weakness in its search business in the last two months.

But as investors proceed to focus less on the credit crisis and more on the impact of a consumer slowdown, some analysts see Google's current valuation as increasingly attractive.

Martin Pyykkonen, an analyst for Wunderlich Securities, says that although Google cannot escape the challenges plaguing the industry as a whole, he still sees the stock as a worthy buy, noting that its forward 12-month price-to-earnings ratio is just under 14. Compare that to its rival, Yahoo! ( YHOO), which has a forward P/E ratio of 24.

"Competitively, nothing's changed -- things have gotten better for them," Pyykkonen says. "They've been dominating Yahoo! for awhile."

And even in tough times Google has continued to throw off cash, generating $1.7 billion of free cash flow in the third quarter. The stock trades at about 12 times cash flow, which looks cheap considering the company's recent dropoff.

Pyykkonen has a buy rating on Google, with a price target of $525.

Indeed, while analysts agree that it's no time to be looking for any sort of a near-term surge in growth for Google, the stock looks like a good investment for anyone looking to stick with it through the long term.

"The near term is not crystal clear but if you like growth stocks ... this still qualifies," Pyykkonen says.

Anmuth noted that he wasn't downgrading Google's rating even though its near-term outlook is less favorable than the long term, adding that "we also think search -- and therefore Google -- will continue to gain share of overall and online ad dollars in the current environment as marketers look toward measurable, success-based vehicles."

"And like in the third quarter, we believe buy-side numbers are currently well below sell-side consensus estimates, suggesting that at least some of the weaker near-term outlook is already reflected in Google's share price," Anmuth wrote.

In the meantime, Google has changed its behavior in the face of a weakening macro economy. During a conference call with analysts following the company's third-quarter results, Chief Executive Eric Schmidt talked about cost reductions, including a significant slowdown in hiring.

In a recent interview with the New York Times, Schmidt said, "The issue we face with the economic crisis is we don't know as managers how long the crisis goes. So what is a prudent answer? A prudent answer is to watch hiring."

Schmidt added that the company is conducting "fairly detailed expense reviews to make sure we are not wasting money."

Pyykkonen says that Google may have neglected such cost controls in the past, adding that "in good times, you can hide your inefficiencies."

Now, he says, the company is more in tune with what's going on.

"If there's further deterioration, they'll keep expenses in check so it doesn't bleed down the bottom line," he says.

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