When Larry Page took the helm at Google as the company’s CEO last spring, the technology titan’s stock was trading at $587.68 a share, a premium of about $100 a share, according to the StarMine Intrinsic Value model. Today, a year later, while the stock has climbed to $635.15 a share, fair value has increased even more rapidly, wiping out the premium and leaving it trading at levels that are slightly undervalued, the StarMine model suggests.
What could help awaken investors to Page’s achievements at the helm of Google and provide a boost to the company’s valuation and share price? Higher earnings, for starters; something that analysts believe are already in the offing, according to those analysts polled by Thomson Reuters, who predict an increase in profits over the coming four quarters (See exhibit 2, below, for details). Nor is Google likely to disappoint investors on the earnings front, according to Thomson Reuters’ proprietary StarMine SmartEstimate score. While the Internet software and services industry has an average Earnings Quality score of 59, that of Google has risen from 74 to 80. Additionally, StarMine’s Price Momentum (Price Mo) model shows Google doing better than 98% of its peers. All that is encouraging for those hoping Page’s leadership will be rewarded with higher valuations.
Although Google’s cash hoard of $45 billion is about half that of Apple’s massive $100 billion war chest, the company clearly has the ability to return some of that cash to shareholders in the form of dividend payments. That doesn’t mean that investors should count on a dividend to boost value and the company’s stock price, however: Page is known for his interest in managing Google’s business for the long term, a strategy that will include ambitious and costly projects. To finance these, Google will want to be able to tap some of that stockpile of cash. Since Page and other top executives own a majority of shares as well as voting control of Google, they can ward off any shareholder demands for dividend payments and concentrate instead on building value by investing for the future and generating sustainable earnings growth.
Page has spearheaded strategic moves (like Google’s foray into social networking, Google+) and analysts see the company as more willing to embrace business risks and undertake experiments than competitors like Apple. Nonetheless, Page also has shown himself to be a skilled hands-on manager of Google’s core search business, intent boosting the number of visitors to Google’s original search engine. Of late, reflecting Page’s interest in this core franchise the company has driven more commercial searches to paid clicks at the expense of free algorithmic clicks.
But while Larry Page is considered a long-term thinker whose big ideas and strategic vision will be a boon to Google, he’s not infallible. Google+ hasn’t taken the social media universe by storm, to put it mildly. Moreover, analysts have criticized him for trying to do too much on too many different fronts at once: investing in a smartphone platform, social media and Google TV even as he continues refining the core search engine business. Moreover, as Google increases its investments in long-term projects, the risk grows that its profit margins may suffer in the coming quarters. For both Google and Page, getting the innovation strategy right and delivering when it comes time to executing those plans is vital if Google’s stock price and fair value are to continue their ascent as they have so far under his watch.
Thus, don’t expect a dividend from Google any time soon; instead, expect more innovation.
Happy anniversary, Mr. Page – and good luck.
For more on analysts’ changing views of Google, please watch this interview with analyst Jharonne Martis.
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