Google: Is $800 a bargain?

The rise in Google’s stock price this year has been remarkable, but is the stock getting too pricey?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The recent rise in Google‘s (NASDAQ: GOOG) stock price this year has been nothing short of remarkable. The stock has climbed 18% year to date, and when factoring the $636 low in November, shares have soared more than 30% over the past four months. Yet, on a long-term discounted cash flow basis, a case can be made that the stock is still very cheap.

Does $800 really mean anything?
I’m beginning to see articles suggesting that Google is the next Apple (NASDAQ: AAPL), meaning that the stock has reached its peak and is due for a crash. Arguments suggest that Google’s price-to-earnings ratio of 25 is somehow too high. And the $800 mark is too much weight to carry. I don’t buy it. Especially not when compared to Amazon‘s (NASDAQ: AMZN) P/E of 3,000.

Granted, these two are in different businesses, but strictly from an operational standpoint, Google has more than a 25% advantage over Amazon in operating margin. And Google’s profit margin of 21.40% is better than Amazon by… well… 21.40%. To suggest that Google doesn’t deserve a P/E of 25 is unfair is to say even with its strong underlying business, it still doesn’t amount to Amazon.

Besides, investors have to realize that Google has changed drastically since the time it went public in 2004 at $84 per share. Since then, not only has Google grown to become the largest search engine in the world, but in Android, Google has the world’s most dominant mobile operating system, well ahead of Apple’s iOS, even though Apple has made some ground in the recent quarter.

And just for good measure, YouTube, which Google acquired in 2006 for $1.65 billion, has been ranked as high as the second most-visited site on the Internet. These are two very important assets that have begun to pay to pay huge dividends. While the $800 per share seems like a large number, Google supports this valuation each quarter with solid top- and bottom-line numbers.

Mobile is still the key
Unlike Apple, which makes tons of money selling hardware, Google’s bread-and-butter is advertising. And, nobody does it better. And even though Facebook (NASDAQ: FB) has begun to gain meaningful traction, particularly with mobile, Google is strongly positioned to avert near-term threats in the mobile segment.

To that end, Google’s recent mobile investments such as Android and Motorola patents have (arguably) placed Google in a better mobile position than what it had in the desktop environment. And the company is doing better than expected in terms of clicks and search market share. And although it’s true that Google’s traffic acquisition costs, or TAC, continue to rise, management doesn’t mind paying distribution partners as long as the company is able to grow market share.

Besides, even with higher TAC, Google still managed to increase paid clicks by 24%. The company’s strategic planning and execution continues to show that it remains focused on one thing — increasing shareholder value. And as long as Google continues to dominate mobile, the stock is going to continue to rise.

Google’s still far from perfect
The company operates a sound business, but Google’s far from flawless. And that’s the scary part. Just imagine where the stock would be today if Google could eliminate some nagging operational issues. Certainly, Motorola comes to mind. For instance, Google posted a 36% year-over-year increase in revenue despite a 56% drop in revenue from Motorola.

Likewise, there was a 6% drop in cost-per-click. This is the metric that tracks how much advertisers pay Google. And Google still has to deal with the 42% increase in operating expenses. Yet despite these costs, net income still managed to jump 7%. In other words, this is far from a mature company. And Google is not even close to reaching its operational excellence. In a recent article, I said the stock should approach $800 to $830 by the second half of this year. Google had other plans.

Foolish takeaway
So is it a bargain? I think I’ve answered this question already, but I don’t mind repeating: it’s still cheap. The best way to evaluate Google’s stock price is on a five-year basis. Even if shares were to drop to $700 after you buy it today, it wouldn’t mean anything to the long-term growth prospects or the underlying fundamentals that Google presents today. While $800 seems like a high price tag, Google wears it well.

Tech stocks like Google aren’t the only game in town. Oil, copper, and gold continue to be in high-demand — and their popularity doesn’t look to be slowing. We’ve uncovered three companies poised to benefit from the rising prices of these commodities. Get our brand-new report — “3 High-Risk/High-Reward Resources Stocks” — FREE!

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Richard Saintvilus, originally appeared on fool.com.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »