March 31, 2013 in Business

Google stock remains attractive even as value continues to soar

Universal Uclick
 
Associated Press photo

Google’s mission is “to organize the world’s information and make it universally accessible and useful.”
(Full-size photo)

Google’s (NASDAQ: GOOG) stock, recently trading for more than $800 per share, is up more than 30 percent this year and has averaged annual growth of more than 20 percent over the past eight years. Is it too late to make money on Google? Probably not. On a long-term discounted cash flow basis, a case can be made that the stock is still very cheap.

We first watched Google become the largest search engine in the world, but it has greatly expanded its scope since then. Its Android mobile operating system is the world’s most dominant one, and YouTube, which it bought in 2006, has ranked as high as the Internet’s second-most-visited site.

Google’s labs operate on the bleeding edge of technology, working on everything from wearable computers to self-driving cars. Google’s mission is “to organize the world’s information and make it universally accessible and useful.”

Few companies have wrought such a profound change on the world in such a short time, while substantially growing its bottom line, expanding its business and treating its employees well.

Remember that you don’t have to buy 100 shares at a time of any stock. If you’re interested in Google, you can buy just a few shares. (The Motley Fool owns shares of Google and its newsletters have recommended it.)

Ask the Fool

Q: What’s the difference between “intrinsic value” and “market value”? – C.B., Opelika, Ala.

A: Great question, as it’s a vital concept for investors. Imagine Meteorite Insurance (ticker: HEDSUP). Its intrinsic value is what it’s really worth, based on factors such as its assets and debt, its anticipated growth rate and, ultimately, the amount of cash it’s expected to generate over its lifetime.

Unfortunately, that’s not easy to determine, and different smart analysts will arrive at different numbers. Plus, things change. Meteorite’s intrinsic value may be estimated around $10 billion, but if a competitor gains a lot of ground, perhaps via a new product, Meteorite’s future, and therefore its intrinsic value, is suddenly different.

Meanwhile, market value is what investors are willing to pay for a company. It’s typically measured by calculating a company’s market capitalization: If Meteorite Insurance has 100 million shares outstanding and the current share price is $60, then its market cap is $6 billion (100 million times $60). If a firm’s estimated intrinsic value is higher than its market value, then its stock is likely undervalued and attractive.

Q: What’s a derivative? – A.M., Portland, Maine

A: It’s a financial contract whose value is “derived” from another security, such as a stock, bond, commodity, currency, or a market index such as the S&P 500. Some common types of derivatives are options, futures and mortgage-backed securities. They’re sometimes used to “hedge” risk, such as when companies limit their exposure to losses from currency exchange rate fluctuations or fuel price volatility.

Some derivatives can be very risky, such as when they’re used to amplify gains (and losses).

My dumbest investment

On July 2, 2000, I read good things about a software company called TenFold in my newspaper. On July 5, I bought shares at $17 apiece. On July 10, the stock dropped $7 per share, giving me a quick 41 percent loss. It was difficult to understand how a company could go from being profitable on July 2 to unprofitable on the 10th. B.T., via email

The Fool responds: A stock can surge or plunge based on a surprising quarterly earnings report. On July 10, TenFold preannounced disappointing results. The market’s view of the company then changed, with more people wanting to sell than buy it, thereby driving the price down.

The company had early success, and its stock went public at $17 per share in 1999, soared to $70 by March 2000, and then sank to around $1 per share as the Internet stock bubble burst. In 2002, the company was hit with an SEC investigation, with the case eventually dismissed. TenFold was eventually acquired by another company in 2008, with shareholders receiving $0.04 per share and convertible preferred stock on an as-converted basis.


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