A strong headline from Seeking Alpha caught my attention yesterday: “Google Earnings Preview: Frustrating Stock, Estimates Still Falling, Needs To Return Capital.”
Not so fast.
Results
Google is set to report its interim results on Thursday, which will likely show that the firm is not efficiently managed in terms of capital allocation.
That’s been a problem for some time given that options are thin on the ground and Google is finding it more difficult to grow as a more profitable entity.
Capital Gains
Is it a problem for shareholders?
Strategically, it makes a lot of sense to hold the trigger and gauge alternatives in this market, although the price to pay is limited capital appreciation for investors over the short term.
True, its strategy is conservative, but it could pay off over the long term.
Performance
The stock is essentially flat for the year, but consensus estimates suggest a price target of $640, which implies upside in the region of 12%.
Consensus estimates have fallen by 4% since October, and I wouldn’t be surprised if the shares struggled on the back of negative reviews from brokers following its quarterly results.
But I am not bothered.
Why?
Valuation
The shares trade on forward p/e multiples of 25x and 21x for 2015 and 2016, respectively, and on 11x and 9x EV/Ebitda multiples over the next two years.
They are not particularly expensive, based on these metrics.
(Alessandro Pasetti and Hedging Beta are not invested in any of the shares mentioned in this article.)