Georgetown University’s Newspaper of Record since 1920

The Hoya

Georgetown University’s Newspaper of Record since 1920

The Hoya

Georgetown University’s Newspaper of Record since 1920

The Hoya

Paragamian: In a Tumultuous Market, Google Remains a Good Investment

What to do in today’s stock market? A month ago, prospects in the U.S. looked bright: The market was rising steadily as impressive corporate earnings and signs of an improving domestic economy brightened financial headlines. On Feb. 18, the S&P 500 Index closed at its highest level in over two and half years.

But then international crises erupted. As civil war violence in Libya reached the country’s capital, fear mounted regarding the nation’s future and its capacity to supply oil to the global market. The uprising sent oil prices soaring and raised concerns about inflationary pressures that these increasing prices could pose on the fragile global economy.

Then an enormous earthquake hit Japan. The earthquake devastated the northern part of the country. But the earthquake’s most significant effects have been the surge in the value of the Yen and the irreparable damage caused to Japan’s nuclear plants with the corresponding radiation dangers. These concerns have incited widespread selling in global markets, leading to huge declines.

Given the current events, there are two opposite paths that I want to address that one can potentially take as an investor. The first is to look at the global situation, sense the palpable alarm, panic and sell off shares. This is the response that many investors have taken. The other approach is to embrace the current circumstances as an excellent opportunity to buy certain stocks that have dropped as a result of the rampant share dumping, but whose earnings prospects remain largely unaffected.

I advise investors to follow the latter path and seize on this drop in stock prices that has made investing in companies considerably cheaper.

Then the question becomes: towards what stocks should we look? Here we return to my central question: how do students spend their time and money?

I will venture a guess that on average we spend at least a few hours per day on the Internet. When you are online and have a question, want to look up information, are unsure of the right page to go to, or need to start a research paper, what website do you type into your browser? Almost unfailingly, it is Google.com. As one would expect, Google.com is currently the most visited site on the worldwide web.

Google Inc. generates the large majority of its revenues — 96 percent to be exact — from advertising. The Internet giant developed and uses advertising programs AdSense and AdWords, through which advertisers can display their ads when users make a related search. For instance, Nike pays Google to show a banner ad for the athletic company’s online merchandise store when users search for “basketball shoes” on Google.

In addition to continually improving its search engine, Google is making strides in expanding beyond its core business, as evidenced by the launch of the mobile software system Android, the Internet browser Chrome, and the computer operating system Chrome OS. These developments provide Google with further platforms to advertise and earn revenue.

Not surprisingly, Google’s earnings releases have been impressive. The company posted earnings per share (EPS) of $26.31 in 2010 and earnings per share growth of 29 percent from the prior year.

Nevertheless, over the last month, Google’s stock has dipped, shedding about 10 percent of its price. That said, although the events mentioned above have been concerning, they do not seem to pose a significant threat to Google’s earnings prospects. Libya’s uprising and the effects of Japan’s earthquake should not considerably impact Google’s advertising profits.

The recent decline in the company’s stock price invites investment, providing student investors with a great opportunity to buy into the Internet giant at a reduced cost without increased risk. With a price to earnings ratio (P/E) of 17.2 based on the 2011 earnings estimate by Standard & Poor’s compared to S&P’s 3-year projected EPS growth rate of 22 percent, Google’s P/E to growth ratio (PEG) is .78, considerably below 1, which is an indication of good value. Moreover, it is rare in today’s market for an industry leader to be trading at a P/E lower than its projected EPS growth rate.

Regarding financials, Google’s balance sheet is pristine. It boasts minimal long-term debt and a huge amount of cash at $34 billion. With this enormous cash position, Google will look to make strategic acquisitions to spread its business into new areas, out-compete rivals and increase earnings. Most recently, the company made an offer to purchase daily coupon company Groupon, and though the deal fell through, the bid displayed Google’s willingness and desire to broaden its presence in a rapidly growing segment of the advertising market — local advertising through online coupons.

Overall, Google’s impressive earnings growth rate, relatively cheap valuation and strong balance sheet make it a very attractive investment.

Matt Paragamian is a sophomore in the College. He can be reached at [email protected]. MoneyMojo appears every other Monday.

To send a letter to the editor on a recent campus issue or Hoya story or a viewpoint on any topic, contact [email protected]. Letters should not exceed 300 words, and viewpoints should be between 600 to 800 words.

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