Google: Cheap and Expensive

NEW YORK (TheStreet) - Another quarter is in the books and Google (GOOG) is still mystifying skeptics trying to make sense of the company's operation.

That's not entirely a surprise because Google is known for wanting to be everything to everyone.

In fact, it's such scattered ambition that caused Google to make an ill-timed acquisition of Motorola, a move that has yet to fully synergize and which added pressure on Google's margins.

None of this mattered after Google's fourth-quarter earnings results last month. Although the stock is at a new 52-week high, these shares still look undervalued.

For the period ending December, the search giant beat Street estimates as net income jumped 6.6% year over year to $2.89 billion, or $8.62 per share. Consolidate revenue surged 36% from last year to $14.42 billion, beating analysts' estimates of $12.34 billion.

However, despite the strong revenue performance, Google reported a 6% drop in cost-per-click over the fourth quarter a year ago. This is the metric that tracks how much companies pay to Google for ads. That it advanced 2% from the third quarter was encouraging, but this was the fifth consecutive quarterly drop.

The concern is Facebook ( FB) is beginning to eat away at Google's advertising dominance, particularly with mobile. What's more, Facebook posted 32% year-over-year growth in ad revenue, proving its move towards sponsored stories has also been effective, helping the company gain more overall footing with advertisers.

Then again, these types of competitive threats continue to be the reason why Google's expenses are always high each quarter. The fourth quarter was no different. Operating expenses climbed to $4.81 billion, or 33% of revenue, one point higher from the previous year.

It's time for the Street to accept that this is how Google operates.

Despite its search dominance, Google has pushed into smartphones, tablets and, most recently, ISP projects. The company can't remain a tech power and still fight off Apple ( AAPL) and Microsoft ( MSFT) without spending. In many respects, its spending have been justified.

Apple's first-quarter earnings results serve as a perfect example. That Apple missed revenue estimates and sold 200 million fewer iPhones than the Street would have liked proves how much of a force Android has become. For that matter, if Google's expenses only served to hurt Apple, I think Google's management would consider that a win.

Then there's Research In Motion ( RIMM), which just unveiled its new line of phones with the new BB10 operating system. Google can assume RIM would not adopt its model and undercut Google by licensing out BB10.

Plus, with Apple having recently surpassed Google in device sales in the U.S., Google can't afford to make it a three-team race. Also, it's not as if Microsoft is going to remain idle and cede what market share it has left.

After reporting earnings last month Google shares shot up and have not stopped climbing, reaching as high as $776. It seems foolish to complain about a stock that's producing $3 billion in profits and growing revenue annually by 36%.

However, the stock seems a bit expensive now that the valuation has reached a P/E of 24, especially when compared to Apple's P/E P/E 10.

Granted, they are in different businesses, but Apple's low valuation is equally hard to justify.

As for this quarter and Google's overall improvements, CEO Larry Page offered this in a statement:
"We ended 2012 with a strong quarter. In today's multi-screen world we face tremendous opportunities as a technology company focused on user benefit. It's an incredibly exciting time to be at Google."

I couldn't agree more. Google is no longer burdened by the Motorola acquisition after having auctioned off the home business to Arris for $2.35 billion. The portion of Motorola Google still owns has the potential to help Google drive Android further and strengthen its smartphone position.

In the meantime, as the company continues to grow its global smartphone position Google should be able to command more from advertisers, a notion that makes the shares look cheap.

With Google's strong cash flow rate and impressive revenue growth, it's not unreasonable to expect shares to reach the $900 level.

At the time of publication the author had a position in AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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