The United States Congress and President have finally averted a debt default and put the government back to work. The response was a stock market rally in which the market was able to focus on earnings instead of the prospect of default-related international financial calamity. The S&P 500 hit an all-time high close of 1,733.15. American Express and Verizon led gainers. Google briefly rose above $1000 in premarket trading based on better than expected earnings. Along with the rest of the world we are relieved that default on US debt did not happen this week. And we wonder is Google overbought at 1000 dollars a share? How much will people pay for pay per click and pay per action advertising? And what ever happened to stock splits?
Where Does Google Make Its Money?
When you Google something you search for it on the internet. When you click on an advertising link at the top of the page the company that placed the ad pays a few cents to a few dollars. Or if you click and then go to a web site and pay for something the company pays a few dollars to many dollars. These are either pay per click or pay per action ads. If you ignore them there is no charge to the advertiser. If you act the advertiser pays for a visit to their web site or for your purchase. Google sells ads on its search engine web pages and on YouTube. That revenue went up twenty-three percent last quarter. On the other hand the cost per click, what advertisers pay, went down eight percent. When the market saw these results they pushed the stock up thirteen percent, briefly over $1000. So, we repeat the question, is Google overbought at 1000 dollars a share. Basically what does fundamental analysis say about the intrinsic value of this stock? If you own Google and only Google is it time to diversify your investment portfolio?
Google and Looking Forward
Google is responsible for android devices and there are a billion of them in use or in the works. It sells apps and content through its Google Play Store. It makes money from its Google Maps service and saw a one third up tic in foreign revenue for the quarter as well. There is certainly good reason to be positive about Google for the time being. However, just how big is the market for online ads that lead you to internet sales pages or sales videos? Think of the auto industry in which there were no cars or trucks and the industry had the potential to make and sell a car for every family in the country if not the world. Once the market was saturated it became more competitive and growth slowed. New competitors entered the arena. What will happen to Google going forward and in that light is Google overbought at 1000 dollars a share?
Share Price and Share Price Growth
What would Microsoft be selling for if it never had a stock split? After nine stock splits Microsoft has kept its stock price in an affordable range. If it had not split the stock might be selling for over $10,000 a share! Basically a high stock price is a deterrent for the average small investor. Our take on this is that by not splitting Google reduces its stock liquidity and is discouraging small long term investors who would normally invest a little every quarter and leave their money in the stock until retirement. When there are enough of these investors in a company it tends to support the stock price because these folks tend to buy a few more shares when prices fall. Is Google overbought at 1000 dollars a share? We think it might be. So, do your own fundamental analysis and stay with Google or pick profitable investment alternatives depending on the results.