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Google is getting garumphed today, down nearly 8% after reporting disappointing results late Thursday. That decline has knocked about $14.5 billion off Google's market capitalization.
So, is Google, now valued at about $171 billion, worth $14.5 billion less today than it was on Thursday morning?
That's the kind of question a value investor would ask. And, of course, the biggest, baddest value investor out there is none other than Warren Buffett, head of Berkshire Hathaway. Would Berkshire, elephant gun in hand, invest in a battered-down Google?
The knee-jerk answer would be: No! Google is exactly the kind of company that Buffett avoids. Too young. Too complicated. Too unpredictable.
Buffett prefers things he knows or can easily understand. His holdings are dominated by insurance, which he understands deeply. Berkshire also owns a bunch of somewhat hum-drum if successful businesses. Justin Boots, See's Candies, Dairy Queen, Fruit of the Loom, MidAmerican Energy Holdings. Set 'em up, knock 'em down. Not too many frills, plenty of cash.
Even his investments echo this staid-ish approach. Coca-Cola, American Express, Wells Fargo.
It is unlikely Buffett would consider an investment in Google. But there are reasons to think Buffett might consider the possibilities. Here are five.
Google is sorta cheap. Buffett loves value (See most of everything he's done.) Hard to believe, but the case can be made. Google at 535 is still well above its 52-week low of 433.63, but sharply off its 52-week high of 642.96. In terms of valuation, Bank of America estimates the company's cash hoard will grow to $130 a share by year-end. With earnings estimates around $34/a share for the year, that makes Google's FY11 price-to-earnings multiple (ex-cash) about 12. [(535-130)/34]. This for a company that just had 28% Q1 revenue growth and EPS growth of about 17%. Another datapoint: Berkshire is paying about 12 times Lubrizol's 2011 earnings (including cash) for a slower growing company.
Google generates a lot of cash. Buffett loves cash. Cash generation is rising, and BofA Merrill Lynch forecasts a free cash flow yield of 5.2% in FY11, up from 3.8% in FY10. And the company has no debt. Back to Lubrizol: It throws off about one-third as much cash-per-share as Google does (FY10: $34.28/share vs. $10.01.) but it also has a strong cash position and, unlike Google, pays a dividend.
Google has a dominant market position. Buffett loves dominance (see Coke). Google controls about 64-65% of search traffic, according to Hitwise and comScore. Second place Bing (Microsoft) is at about 14%. Bing also powers Yahoo, which gives it about 30% of “Bing-powered” search. Add those up and you have a duopoly with Google playing Macy to Microsoft's Gimbel.
Google has a strong brand. Buffett loves brands. It is much more than search, of course, even though it has stumbled at times to execute on new ideas. Still, Google Android is big in the Tablet Wars and in SmartPhones. Google Chrome is growing, now with about 11% of browser market share, trailing Microsoft Explorer and Firefox.
Google is similar to a recent investment winner. Buffett loves to make dough (duh), and one way he does so is by buying when others are selling. Folks are certainly selling Google today. But the Buffettologists will say: Google is in a fast-moving, complicated, unpredictable business – bad for the Oracle! Moreover, Buffett has never really bought technology, unless you count whatever makes the DQ Blizzard possible. And unlike just about everything Buffett owns, a great deal of what makes Google Google exits the building everyday. But you could say many of the same things about Goldman Sachs, the ultimate talent/people franchise. And Buffett/Berkshire invested in Goldman during the financial crisis and made a pretty penny in the process. Google isn't facing a similar cataclysmic moment, so the comparison is imperfect. All the same, the Oracle has shown some stomach for this kind of business in the past, despite what the Buffettologists would have you believe.
What say you?
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. The Wall Street Journal's Chief Markets Commentator Dave Kansas and MarketBeat lead writer Matt Phillips spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Dave at dave.kansas@wsj.com or Matt at matt.phillips@wsj.com.
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