Buy Google As P/E Compression May Soon End; 2Q 2012 Earnings Good Enough For Investors

[First appeared on Seeking Alpha on July 22, 2012]

Google's (GOOG) 2Q earnings satisfied investors who had been cautious. However, the real story behind Google's stock price performance has been its P/E multiple compression. A we discuss below, this trend has mostly played out and Google's stock price may benefit going forward as the headwind from multiple compression abates. Regarding 2Q earnings, the key metrics for Google are Paid Clicks, up 42% YoY, and Cost Per Click ("CPC"), down -16% YoY. We think that as long as Google continues to show solid growth in its core business it should receive a premium valuation because of the optionality in its emerging businesses, including YouTube, Android and enterprise. In this update we will review the 2Q results using our six question earnings checklist (see also our analysis of other tech companies' 2Q earnings: IBM (IBM), Intel (INTC)). As well, we will look at the valuations of comparable companies and explain our basic thesis for owning Google's shares.

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