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5 reasons why Google has its mojo back

December 13, 2012: 12:54 PM ET
It's back! While iPhone owners celebrate the return of Google Maps, investors are bidding up Google stock as well.

It's back! While iPhone owners celebrate the return of Google Maps, investors are bidding up Google stock as well.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

Google Maps isn't the only thing that recently made a stirring comeback. So has Google's stock.

Shares of Google (GOOG) were up about 1% Thursday following the triumphant return of the company's maps to Apple's App Store. The stock was trading around $705. If shares finish the day above the $700 mark, that would be the first time that's happened since October 17 ... the day before Google's disastrous third-quarter earnings report.

Google's latest results were, to quote Jimi Hendrix, a "frustrating mess." First, the company's profits missed forecasts by a fairly wide margin.

What's even more memorable was that Google's earnings were inadvertently released several hours early (while the market was still open) thanks to what Google claimed was an error by financial printing company R.R. Donnelly (RRD). The premature SEC filing included space for a yet-to-be-written statement from Google CEO Larry Page. That gave birth to @PendingLarry, a briefly popular Twitter phenomenon among geeks and financial journalists the day of the earnings boo-boo.

Related: Fortune's exclusive interview with Larry Page

Google's stock plunged 8% after the results came out. They slipped another 8% over the next few weeks before starting to bounce back.

Shares of Google are up 11% since the middle of November. The stock is now only 6% below where it was trading before it announced third-quarter earnings, and shares are just 9% below the all-time high they hit in early October. Apple (AAPL), by way of comparison, is still in bear market territory, trading 24% below its all-time high.

So can Google continue to rally? Yes. Here are 5 reasons why.

The sell-off was a massive overreaction: Yes, Google's earnings missed badly. The company reported a profit (excluding charges) of $9.03 cents per share, compared to Wall Street's consensus estimate of $10.65 a share. And yes, profits fell from a year ago. But that was mainly due to higher capital expenditures -- i.e. investments in the future -- and restructuring at the company's newly acquired Motorola Mobility unit. Google's revenues, excluding the addition of Motorola sales, rose a healthy 18.6% in the third quarter from a year ago. Google is not a company in decline. This isn't HP (HPQ).

Analysts were too Googly-eyed: The problem last quarter wasn't that Google was facing stiffer challenges in the online ad market from the likes of Facebook (FB), Microsoft (MSFT) and a rejuvenated Yahoo (YHOO). The problem was that analyst expectations were simply way too high. Google refuses to play Wall Street's silly reindeer games of spoon-feeding estimates to the sell-side. Because Google embarrassed them so badly last quarter, Google analysts have adjusted fourth-quarter estimates to more reasonable levels. They are now predicting Google will earn $10.50 a share in the quarter, down from projections of $11.67 two months ago.

If anything, analysts may have cut too far. Google might have a fairly easy bar to hurdle when it releases results in late January. Consider this: According to Estimize, a site that crowd-sources earnings and revenue estimates, the consensus fourth-quarter forecast for Google's earnings is $11.17 a share. Estimize includes forecasts from hedge fund managers as well as other so-called buy-side analysts, who tend to have a better track record of predicting earnings.

Google is a good bargain: Shares of Google are not dirt cheap. They trade at 15 times 2013 earnings estimates. But that's not an exorbitant price to pay for a company whose earnings are expected to increase 16.5% next year. What's more, Google is trading at a big discount to Facebook (FB), which is valued at a lofty 44 times next year's earnings projections.

Google is even less expensive than Yahoo (YHOO), which is trading at 17 times earnings estimates for 2013.

While new CEO Marissa Mayer has brought a new sense of excitement to Yahoo, is it really fair for the Purple Portal -- which is still very much a turnaround story -- to trade at a higher valuation than Google? I don't think so.

Not paranoid about Android: Research firm IDC reported earlier this month that it expects tablets running on Google's Android operating system to take more market share from Apple's iPad line this year. IDC cited "solid products" from Google as well as Samsung and Amazon (AMZN), whose Kindle Fire runs on a modified version of Android.

Related: Zombie tech stocks live!

That news follows a report from research firm Gartner in November which showed that Android's global smartphone market share lead over Apple's iOS and Research in Motion's (RIMM) BlackBerry increased dramatically in the third quarter. That was due largely to strong sales of Samsung's Galaxy line of phones. While many investors wonder if Facebook, Yahoo and Microsoft will ever be able to develop a truly successful mobile strategy, Google already has one.

Google wants to be your cable company: Google is often criticized for initiatives that stray a little too far from its core business and into the realm of science fiction. Project Glass? Driverless cars? Google has also had its share of more conventional ideas that don't pan out. Ahem ... Google+, anyone? But Google may have a huge new revenue and earnings win in the not-so-distant future with its Google Fiber service. The company currently has wired Kansas City for Internet access and cable TV.

The roll-out has been promising. Earlier this week, Netflix (NFLX) ranked Google Fiber as the fastest Internet service provider for video streaming. Of course, it would be prohibitively expensive for Google to wire the whole country for Google Fiber. But if the Kansas experiment is a success, you can bet Google will look at other potential markets. After all, Google does have $45.7 billion in cash on its balance sheet. It could clearly afford to use some of that to expand Google Fiber to bigger cities.

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About This Author
Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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