By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 1/25/10 Sign up for free Cabot Wealth Advisory e-newsletter
Google (GOOG), one of the most recognized companies in the world, is now leading the way in cloud computing...which fits in well with the company's mission: "To organize the world's information and make it universally accessible and useful." Google generates revenue by providing companies with opportunities for targeted advertising. Thousands of companies use Google's AdWords and AdSense programs to promote their products and services on the Web with advertising relevant to the information displayed on search pages.
Google management has aggressively stayed ahead of its competition by expanding and improving GOOG's search engine and advertising. Founded just 10 years ago, the company's 2009 sales exceeded $23 billion with profits of more than $6 billion. The balance sheet is very strong with no debt and $24 billion in cash. The company pays no dividend.
Google appears to be the leading developer of cloud computing. Google employees can now store most of their business and personal software and data, such as pictures, videos, presentations and emails, on the Web. This makes software and data equally accessible from home computers, public Internet cafés or smart phones. Google's cloud computing also makes damage to a hard drive less important.
According to a Wall Street Journal article, Google is expected to launch a service in 2010 that will let users store the contents of entire hard drives online. The company has not confirmed this plan, but Google already enables users to port personal and business data to the Internet and use the company's Web-based software. Google's Calendar organizes events, Picasa stores pictures, YouTube (now owned by GOOG) holds videos, Gmail stores emails, and Google Docs stores documents, spreadsheets and presentations.
Sales increased 9% during the 12 months ended 12/31/09 while earnings per share jumped 19%. We expect sales growth of 14% and EPS growth of 20% in 2010 and in future years. Google will continue to benefit from increasing Internet usage and the effectiveness of online advertising.
Google may cease operations in China because of cyber attacks on Google users and China's censorship of free speech. I believe the Chinese government will not back down, and Google will cease operations in China. The company, though, derives less than 1% of its revenues from China!
The recent decline in Google shares has created an outstanding buying opportunity for investors. GOOG shares now sell at 24.8 times my 2010 earnings per share forecast of 23.50, which is low in comparison to the 20% EPS growth that we foresee during the next three to five years.
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J. Royden Ward
Editor of
Cabot Benjamin Graham Value Letter A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of
Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the
Value Letter.