Google needs a new killer app to make it a buy

Commentary: A new revenue stream is a must for the company.

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 Feb. 4, 2013, 6:01 a.m. EST 

 

 http://www.marketwatch.com/story/google-needs-a-new-killer-app-to-make-it-a-buy-2013-02-04?siteid=bigcharts&dist=bigcharts

 

 

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By Chris Kacher and Gil Morales

NEW YORK (MarketWatch) — While the demise of Apple AAPL -1.81%  has left many owners and “bargain hunters” of that stock high and dry, Google has gone the opposite way, rallying not quite 8% after coming in with a better-than-expected earnings report on Jan. 22. In the short-term Google may emerge as a beneficiary of money flows out of Apple and into the Internet search giant’s own stock, but what are the real long-term prospects for Google going forward?

While Google GOOG -1.64%  has dominance in search-engine technology and derives more than 95% of its revenues from pay-per-click Adwords services, the playing field is becoming increasingly crowded, and at breakneck speed.

TRADING STRATEGIES: February

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Trading Strategies looks at Microsoft Corp., Apple Inc., Google Inc., and Yahoo Inc., their strengths and weaknesses and where they go from here.
• Which tech company reigns supreme?
• Google needs a new killer app to make it a buy
• Apple is dead money for now
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• Microsoft: Nothing to offer beyond the dividend

Further, while the company grew into a super-cap valued at just under $200 billion, since 2010, Google stock has failed to keep pace with the general market, and the rapid growth it enjoyed when it was a smaller company as a strong, powerful 30-something has slowly tailed off as the stock reaches “middle age.”

This price path is not dissimilar to other former big stock leaders of the past such as International Business Machines (IBM), Microsoft MSFT -1.38%  , and Cisco Systems (CSCO), all of which enjoyed huge price advances in their younger years but have since become relatively slower, mature companies.

In our view, the critical factor for investors to consider when purchasing Google stock is this: What sort of massive, growth-generating “killer app” does it have up its sleeves that would justify an increase in its market cap from current levels?

Ideally, an investor looking for growth would like to see a price move of 50%-100% in one year, but this would send Google’s market cap soaring toward $300-$400 billion. Where among its broadening menu of product offerings, from tablets and smartphones to search, online shopping and social media do we find anything capable of producing the huge top-line growth that will translate into something more than the 12% earnings growth seen in its most recently reported quarter?

Google does have plans to wire homes with high-speed internet and video, is now manufacturing tablets and smartphones through newly acquired Motorola Mobile, and is expected to develop a service that will help retailers offer same-day delivery of goods to online shoppers. But none of these are “killer apps.”

Without a major driver for forward earnings growth, even trading at only 16 times forward 12-month earnings estimates, Google’s current stock price might still be considered somewhat rich for a company that is expected to grow earnings 5% in the next quarter, according to analysts’ estimates, and just under 15% on an annual basis for the next four years.

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Google (GOOG) daily chart

While it is difficult to imagine what could drive strong growth in Google going forward, the technical picture in the stock has improved. As we can see in the chart above, it has even improved to the point where the stock was able to generate an upside gap and base-breakout that has taken the stock very near to its all-time high reached in October of last year.

If something significant is afoot at Google, then the first place it will show up will be in the price/volume action of the stock. Over the past week or so Google has exhibited strong action in this regard following its strong January earnings report.

In our view, one does not have to have a strong opinion to continue holding the stock, since if the stock does have strong upside price potential going forward, it should easily hold up above the 740 price level, roughly the level of its recent trendline base-breakout, as can be seen in the chart.

Thus, in our view, Google is a “hold” until and unless it breaks down through the 740 level or if it again begins to lag the pace of the general market as it has done in the recent past. For investors who find a reason to believe strongly in the company’s future potential, the stock is in fact in a buyable range using the 740 price level as a selling guide should the stock fail to hold above its recent breakout.

Gil Morales and Dr. Chris Kacher are both principals and managing directors of MoKa Investors LLC, cofounders of Virtue of Selfish Investing, LLC www.selfishinvesting.com and co-authors of “In the Trading Cockpit with the O’Neil Disciples: Strategies that Made us 18,000% in the Stock Market.” (Wiley, Dec. 2012)