Yesterday Google (GOOG) beat expectations with EPS of $10.65, just 1.5% above expectations but enough to cause the stock to jump above $740 and several analysts to raise their price targets. For instance, Citi analyst Neil Doshi rose the stock’s price target to $830, and JPMorgan analyst Doug Anmuth rose his target price to $860. The stock is still below its median target of $820 and the most optimistic analyst’s expectation of $900.
All this buzz is a sharp turn from earlier market sentiment. Just take a look at the stock’s 6 months past performance:
While the trend line is directionally positive, the stock’s higher volatility and steeper fall in 4Q 2012 amidst worries that the lower profits from mobile advertising were going to hit Google’s bottom line while higher target-acquisition costs (TAC) would put more and more pressure on the company’s profit margin. This fall was not macroeconomic and was certainly not solely due to investor panic about a fiscal cliff. It had a lot to do with fear that Google couldn’t make as much money from people tapping on mobile phones as it did from people clicking on desktop and laptop mice.
Then something surprising happened: revenue from advertising went up. Ad revenue is still the vast majority of Google’s operating income, and probably will be for the next decade, at least. There was a very strong and persistent fear that Google could not navigate the shift to mobile, but this shift was a central focus of the firm’s earnings call, which Zolio suggests one read over carefully.
Hindsight and Foresight
Hindsight is 20/20, and we at Zolio think the slew of analyst upgrades is nothing for Wall Street to be proud of. Instead, it demonstrates that Google has managed a technological transition with ease, just as it has done for the past decade. How can investors predict this before the earnings?
The most valuable asset in investing is knowledge. Those who understand technology, online advertising, Google’s history, and Google’s strategies could have easily seen this coming, and invested accordingly. Google’s strong performance and the analysts’ sluggish response is again testament to the bottom-up investing strategy made famous by Warren Buffett, even if he would never invest in Google. But that’s because he doesn’t understand technology, as he’s said many times. Another fundamental analyst who understands technology, on the other hand, could have jumped in when the company was at $675 back in November and held for this earnings call. That strategy would have resulted in a 9.6% appreciation of the investment in 2 months, or about a 60% annualized return. Not bad at all.