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Is Google a Buy, Sell, or Hold?

Is Google a Buy, Sell, or Hold?

Posted On August 24, 2020 4:01 am
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It’s been an uneventful year for Google (GOOG),(GOOGL)  as it has significantly underperformed the Nasdaq-100 (QQQ) year-to-date, up just 16% vs. the index’s 32% return.

However, this might finally be about to change as the stock is breaking out of a multi-month cup base and finally starting to show relative strength against the major averages. While the company had a tough Q2 as it was one of the only FAANG stocks with revenues down year-over-year, its earnings trend remains solid.

Given that the stock is out of favor, and is a much less crowded pick among the FAANG names, I would expect any sharp pullbacks towards the $1,520.00 level to be low-risk buying opportunities.

While most of the FAANG names have put up exceptional returns year-to-date, Google has lagged behind the group, unable to match the performance of the Nasdaq Composite.

The reason for this soft performance is that the company is one of the few tech names that’s taken a hit from COVID-19, with sales down (-) 2% year-over-year in Q2. However, if we dig into the results a little deeper, we can see that Google Other (including Youtube Premium) and Google Cloud both saw an outstanding performance, growing 24% and 43%, respectively.

Unfortunately, the softness came from Google Search, which is the most significant contributor to revenues. This shouldn’t be surprising amid a global pandemic.

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(Source: Company News Release)

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(Source: YCharts.com, Author’s Chart)

If we take a look at Google’s earnings trend, the company has done an exceptional job growing annual earnings per share [EPS] as a mega-cap, with annual EPS growing from $19.82 in FY2014 to $48.94 last year.

Obviously, this 19% compound annual EPS growth rate pales to some of the growth stocks out there in the market, but for a mega-cap like Google, these are very respectable figures. While FY2020 annual EPS is expected to decline year-over-year, which certainly isn’t what any investor wants to see, it’s important to point out that this is merely an aberration within the trend higher in annual EPS.

If we look at FY2021 annual EPS, we should see a new all-time high at $57.20 based on estimates, and FY2022 is projected to see double-digit growth as well with forecasts of $69.55. Therefore, while we are seeing some material deceleration this year, a single year slowdown amid a global pandemic is nothing to lose any sleep over.

In fact, if we run a calculation on the compound annual EPS growth rate out to FY2022, Google is growing at…

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