Although it has been up and running (and including the feed for Stock Market Beat) for some time now, various issues have kept me from giving newly launched news feeder newsflashr the attention it deserves. Having finally gotten the opportunity to do so, I like what I see.

Newsflashr distinguishes itself from other aggregators through ease of use and transparency. A tag cloud shows the hottest topics du jour, and users can click to see what either mainstream media or a selection of top bloggers has been saying about the subject. Headlines are ranked according to relevance (number of times a keyword appears in the headline) and the popularity of the source.

I found it particularly useful for getting a quick feel for the response to events such as Google’s earnings announcement. The list of headlines gave the usual “Google Beats,” along with a quick way of spotting the more interesting “Why Was Everyone Wrong-sided on Google?“. 

For a more general idea of what is being talked about, the feed view lists the various sources and offers a quick skim of their most recent headlines, more akin to a traditional news reader.

If I have any complaint about the service, it is the lack of a full-feed view. Clicking a headline opens that site in a new window, which I appreciate as a publisher, but sometimes wish to avoid as a reader. Also, the feeds available are currently limited to a selection (admittedly a large one) of the top sources. While these are indeed the sources I most frequently consider, there are other sources I would like to be able to add as part of a personalized newsflashr. Based on what I have seen, I would bet adding those features is simply a matter of time.

All in all, I expect I will turn more frequently to newsflashr, and over time may cull the feeds it includes from my current feed reader since its presentation of those feeds is more useful.

This article is a reprint of my February 5, 2008 RealMoney column

In the wake of Google’s (GOOG - Annual Report) disappointing earnings results and Microsoft’s (MSFT - Annual Report) premium bid for Yahoo! (YHOO), I started wondering if Google might finally be cheap enough to consider buying on a contrarian/value basis.

Google generated $3.37 billion in free cash flow (cash from operations less capital expenditures) in 2007, sufficient for a 2.5% free cash flow yield based on the latest enterprise value estimate. That isn’t much less than the 2.8% yield on 5-year Treasuries, and the Treasury yield, unlike Google’s free cash flow, is not doubling annually.

It is also significantly higher than the 2.1% free cash flow yield Microsoft will capture if it succeeds in its $44.6 billion acquisition of Yahoo! On the other hand, if Microsoft truly manages to wring $1 billion in annual synergies from the deal and those synergies flow through to cash rather than just accounting earnings the yield for Microsoft would double. Since that is a lot of “ifs,” I’ll stick to the 2.1% number.

At a 2.1% free cash flow yield, Google would trade for $553. And that is assuming the company were truly similar to Yahoo!  In fact, Google is growing its revenue at more than 50% per year rather than Yahoo!’s 8.3%, and is estimated to grow its earnings per share nearly 33% annually over the next five years rather than 23% for Yahoo! If anything, Google should capture a much higher valuation than Yahoo!

For example, assuming both companies were to grow at the expected rate for five years and then at the same rate as the S&P 500 thereafter, they might both decline to a 15x P/E multiple over the five year horizon. In such a situation, the five-year price target for Yahoo! would be $19.50, while the five-year price target for Google would be $886. If anything, that scenario seems a bit conservative for Google and a bit aggressive for Yahoo! in my opinion.

The Downside

While there is no doubt that contextual search ads are a more desirable advertising venue since customers can monitor the results, I don’t buy the notion that Google can see increased ad spending during a recession. If ad budgets are cut, I think the revenue advertisers will be willing to pay for each click will go down. I accept that the search ads might be less impacted than other outlets, but just don’t believe that budgets formerly reserved for TV, for example, will be shifted to search.

I also think Yahoo! offers some insight as to the worst-case scenario for Google in a recession environment, based on what happened to Yahoo! in 2001. Revenues declined 35% in 2001, operating expenses continued to creep up, and free cash flow got hammered.

The comparison to Yahoo! during the tech bust is probably too conservative. Yahoo’s display ads in 2001 did not offer nearly the advertiser measurability that Google’s search ads provide. Further, Yahoo! stock was unfairly tainted by all of the other Internet stocks that didn’t deserve to trade at all, let alone at lofty multiples of sales. Still, I think there are useful comparisons to draw from such recent history.

I could see Google’s revenue declining as much as 20% year/year, which I don’t think many analysts give much credence. Its earnings would plummet in such a situation because Google continues to add operating expense. I don’t see $5.00 in EPS as being out of the question. But in 2001 Yahoo! ended up with a 100x P/E multiple against its 2002 earnings per share (the trailing earnings had gone negative.)

At 100x my recession-trough EPS estimate of $5.00, Google is fairly valued today.

Sure, history never repeats exactly. And sure, momentum could take Google significantly lower regardless of the logic (or lack thereof) in my analysis.

But to me, Google is starting to look like a value stock.

This article was originally published at RealMoney on September 17, 2007 and was featured in the September 24, 2007 Festival of Stocks.

Few stocks boil the blood of both bull and bear as much as Apple (AAPL), and for good reason. The company, richly valued though it is, has come out with more cool products than the rest of the tech industry combined. That helps excite the bulls, and as for the bears, there’s a good chance many of them are jealous for having missed out on the stock’s run. They have sour grapes they hope will someday be pressed into wine. And before you fanboys of some other tech stock get all hot and bothered about my disrespect of your favorite company’s innovation record, allow me to summarily dismiss them.

• Research in Motion’s (RIMM) Blackberry? Great mobile enterprise email device. But that’s for work. Ewww!
• VMWare (VMW)? See above. Not to mention it’s hard to show off your virtual server.
• First Solar (FSLR)? Try this for a pickup line: “Hey, want to go back to my place and see how thin my solar film is?” Unh-uh.
• Google (GOOG - Annual Report)? Still great at search. Nice email product. So what? They’ve spent more than a billion and a half on research and development in the last 12 months, and I dare you to tell me where it went.

As you can probably tell, I haven’t gotten nearly enough hate mail recently, and I’m trying to kick things up a notch. So back to the task at hand: Apple. Let’s quickly take a look at what I think are the best arguments on each side.

First up is whether the “halo effect” from the iPod is helping bread and butter Mac sales. Mac units were up 33% year over year, compared with just 12% for PCs overall. Bears counter that most PC makers (with the exception of industry leader Dell (DELL) had unit growth similar to the growth in Macs. But this ignores the very important point that Mac units sell for much more on average than the typical PC – so in terms of revenue share is likely growing much faster. Edge: Bulls.

Next, is the iPhone a phlop? When 270,000 units were sold in the first two days, I said “the 730,000 they are guiding to for the next three months seem conservative laughably low.” It is now looking as though it was only conservative. It is pretty clear the price cut was driven in part by a significant slowdown in sales – to possibly as low as 5,000 units per day by the time of the price cut according to one convincing analysis. But that would still put the iPhone in the same league as Palm, even if not quite matching their original estimate of being in RIMM’s league next year. But don’t forget – they got where they are now being sold by one carrier in the U.S. As they roll out to other carriers on other continents, they could meet their target yet. It’s not living up to the hype, but it is still a success. Edge: Even.

Finally, the iPod – a product that nobody seems to care about anymore, yet which sold 10 million units last quarter when it hadn’t had a product refresh in ages.

From an accounting standpoint, things are going so well that they are now deferring revenue from their new products rather than booking it up front. This practice will help bake some growth into the cake. True, the company’s earnings were boosted by a penny due to a lower bad debt reserve, but when you are beating quarterly estimates by a quarter that is just chicken feed.

While the stock has nearly doubled over the last year, its free cash flow has more than tripled. As a result, a company that is growing at more than 20% per year on the top line is yielding 3.9% on a free cash flow to enterprise value basis.

About the most significant risk, in my mind, is the possibility of a consumer slowdown combined with increasingly high expectations. Apple is far more consumer-driven than other tech stocks, and a 40x P/E multiple might not hold up if they only beat by a nickel instead of the quarter investors have come to expect. That’s why I think the free cash flow is so important in this case – it provides a solid backstop, and would help justify being patient through a slowdown should it come. If the company can grow at even half the current rate over the next five years, investors are likely to be well compensated for the added risk.

Positions: Short Research in Motion (RIMM)

According to Reuters:

Shares tumbled 5.5 percent in extended trade after Google (GOOG - Annual Report) said net income rose to $925 million, or $2.93 a diluted share, compared with the year-ago quarter’s $721.1 million, or $2.33 per share. Excluding one-time items and stock option expenses, Google posted a profit of $1.12 billion or $3.56 per share, which was 3 cents per share short of Wall Street targets.

That three-cent miss led to a $40 selloff in after-hours trading, reducing the trailing P/E multiple from 42x to 38x. Bulls will no doubt argue that the stock is still a high-profitability high growth wonder trading at a market multiple on a P/E/G basis. But I think that misses some important points.

First of all, the company has beaten estimates by approximately 10% in each of the prior four quarters. Given that track record, it is likely investors were really expecting the company to beat by 10% or about $0.30. So in reality this was more like a $0.33 miss than $0.03.  Seen from that perspective the multiple has barely budged despite what is arguably a significant slowdown in the growth rate.

Secondly, with GAAP earnings growth of 25% Google suddenly doesn’t look nearly as special as it used to. Heck, Tempur-Pedic (TPX) gave us 30% EPS growth at half the multiple. So much for exciting tech stocks when geriatric mattresses can top them.

In Google’s favor is the fact that they don’t play any guidance games (though the Street tries to do it for them.) So next quarter things could quite suddenly look wonderful again. But this report should give everyone a wake-up call saying they shouldn’t count “forward earnings” before they hatch.

The Economic Calendar is fairly active this week.

• PPI (Tuesday) – Look for my usual breakdown of the industries with pricing power
• Industrial Production (Tuesday) – Let’s see if businesses really are picking up steam
• CPI (Wednesday) – We know food costs more. What else does?
• Housing Starts (Wednesday) – Preview: They will be bad, and if not it will be bad news.
• Leading Indicators (Thursday)

The Earnings Calendar is going into overdrive this week. Some names I’ll be watching:

• Tata Consultancy Services (TCS)  – What will they say on Monday about rising wages and currencies?
• Intel (INTC - Annual Report) – (Tuesday) – Estimates seem low enough. Margins will improve ex Flash.
• Yahoo! (YHOO) – (Tuesday) – Low expectations likely justified but perhaps rewarded.
• American Standard (ASD) – (Wednesday) – They are on my Large Cap Watch List (Track at Marketocracy) and they are on the move. They’re picking up momentum and I suspect they will top estimates.
• Silgan Holdings (SLGN - Annual Report) – (Wednesday) – They are on my Small Cap Watch List (Track at Marketocracy) and have been blowing estimates out of the water. This one seems like another beater to me.
• Advanced Micro Devices (AMD - Annual Report) – (Thursday) – Hard to see how it could get any worse, but if anyone can pull it off…
• Landstar System (LSTR - Annual Report) – (Thursday) – This is one of my favorite companies and is on both the Small Cap Watch List (Track at Marketocracy) and the Mid Cap Watch List (Track at Marketocracy). They are trading a touch higher than I would like, though.
• Google (GOOG - Annual Report) – (Thursday) – Numbers are set up for them to beat them. If they don’t beat by enough, however, the stock could still suffer.
• Sandisk (SNDK - Annual Report) – (Thursday) – Who knows?
• SAP (SAP - Annual Report) – (Thursday) – Shouldn’t be much to trade on, but they might say something nasty about Oracle (ORCL - Annual Report) to make listening to their call worthwhile.
• Tempur-Pedic (TPX) – (Thursday) This one also graces both the Small Cap Watch List (Track at Marketocracy) and the Mid Cap Watch List (Track at Marketocracy). Estimates have been rising but they will probably still beat them.

Keep on your toes!

Google’s results solved the mystery over the whereabouts of Yahoo’s revenues. With twice the revenue base growing nine times as quickly, there just isn’t much of a competition going on. The differences come through loud and clear when one compares the conference calls.

Eric Schmidt

Well, thank you very much, Kim. As everybody can see from the press release, we are ecstatic about our financial results this past quarter. Before I start talking about how well we did this quarter, I would like to remind everybody as I have each year at this time, that we are about to enter our seasonally slower summer growth period, and make sure you factor that in when thinking about how our business will grow.

(Excerpt from full GOOG conference call transcript)

Googlers have reason to be exstatic, and Schmidt’s attempt to rein in analyst enthusiasm (to keep the estimates low enough to be blown away again next quarter) does nothing to dampen it.

Terry Semel

Good afternoon, everyone. Let me begin by reminding you of our strategy, designed to enable us to capture the future growth of the Internet.

(Excerpt from full YHOO conference call transcript)

‘Cause Lord knows they aren’t capturing its present growth.

Sometimes I worry that we spend so much time talking about all the new things that we don’t focus as much on the core business, especially in our marketing and messaging.

Excerpt from full GOOG conference call transcript)

That worrying about focus will most likely mean they never have to say:

Over the past six months, we have made clear our intention to sharpen Yahoo!’s focus on our key customer segments and our strategic priorities.

(Excerpt from full YHOO conference call transcript)

Both companies talked extensively about growth opportunities. Yahoo talked up Panama, while Google discussed the acquisition of Doubleclick. But what is clear is that Yahoo’s plans are all about catching up, while Google is looking to cement its lead.

Google Announces First Quarter 2007 Results: Financial News – Yahoo! Finance

Google reported revenues of $3.66 billion for the quarter ended March 31, 2007, an increase of 63% compared to the first quarter of 2006 and an increase of 14% compared to the fourth quarter of 2006. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. In the first quarter of 2007, TAC totaled $1.13 billion, or 31% of advertising revenues.

GAAP EPS for the first quarter of 2007 was $3.18 on 315 million diluted shares outstanding, compared to $3.29 for the fourth quarter of 2006 on 313 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2007 was $3.68, compared to $3.18 in the fourth quarter of 2006.

So that’s where Yahoo’s revenue’s went. As we noted in our earnings preview, consensus expected $3.30 (non-GAAP) on $2.5 billion in revenue (net of TAC) this quarter and $3.41 on $2.63 billion next. Despite being twice Yahoo’s size, Google grew its revenues nine times as fast. The financial statements yielded virtually nothing worth criticizing, so we’re stuck with Google’s practice of not issuing guidance.

The Economic Calendar shows three potentially important news releases this week:

• Monday’s retail sales report (Consensus 0.6%, 0.9% less autos)
• CPI on Tuesday (Consensus 0.2% core, 0.6% headline)
• Housing Starts on Tuesday (Consensus 1.49 million, SA)

Earnings season is quite active this week as well.

Tuesday

• IBM (IBM - Annual Report) – Consensus expects $1.21 on $21.86 billion in revenue and next-quarter guidance of $1.46 on $23.04 billion. Given that these numbers represent sales growth of 5.8% and 5.2%, respectively, it would be a near-disaster if they miss.
• Intel (INTC - Annual Report) – Consensus wants $0.22 on $9 billion this quarter and $0.22 on $8.9 billion next. We think that next quarter sales figure, which represents 10.8% year/year growth, is too optimistic.
• Linear Technology (LLTC) – Consensus wants $0.32 on $254 million this quarter and $0.34 on $263 million next.
• Yahoo! (YHOO) – Consensus expects $0.11 on $1.21 billion this quarter and $0.13 on 1.28 billion next.

Wednesday

• Motorola (MOT - Annual Report) – Consensus expects $0.02 on $9.3 billion this quarter and $0.08 on $10 billion next. They already preannounced, so the guidance is the important bit. Numbers have come down dramatically but may have further yet to go.

Thursday

• Armor Holdings (AH) – Consensus wants $1.11 on $841 million this quarter and $0.92 on $775 next. There may well be a guidance beat since the numbers expect a significant growth slowdown year/year.
• Advanced Micro Devices (AMD - Annual Report) – Expected to lose $0.46 on $1.34 billion in sales this quarter and $0.36 on $1.35 billion next. Given how disastrous the current outlook is, we may be getting near the bottom for estimates. Valuation, however, remains questionable. We hate negative P/E multiples.
• Google (GOOG - Annual Report) – Consensus expects $3.30 on $2.5 billion in revenue this quarter and $3.41 on $2.63 billion next. The Double-click acquisition may help next quarter. Without it, the estimates seem more realistic (less room for upside surprise) than they have been recently.
• Landstar (LSTR - Annual Report) – Consensus expects $0.40 on $590 million this quarter and $0.54 on $656 million next. We think they will beat.
• Nokia (NOK) – Consensus expects $0.32 on $13.1 billion this quarter, $0.34 on $13.9 billion next. We take the under.

Friday

• SAP (SAP - Annual Report) – Consensus expects $0.36 on $2.93 billion this quarter and $0.44 on $3.17 billion next. Both seem on the high side.
• Xerox (XRX)  – Consensus expects $0.20 on $3.82 billion this quarter and $0.27 on $4.09 next. The estimates have come down but are at the high end of revised guidance.

“If you ain’t got Mojo Nixon then your store could use some fixin!” – The Dead Milkmen, Punk Rock Girl

Yahoo! (YHOO) has not been performing as well as Google (GOOG - Annual Report) recently, and Jim Cramer thinks the store could use some acquisition. So far in the last few names he has proposed Bankrate (RATE), Monster (MNST) and The Knot (KNOT). Basically it seems as though Cramer feels any publicly traded content company would do.
Yahoo! already knocks Google’s socks off when it comes to proprietary content. If they want to beat Google it seems unlikely that even more proprietary content will do the trick.

No, Yahoo’s opportunity to beat Google can come from building a better search mousetrap or coming up with something completely different – a product with real mojo.
Maybe the Milkmen were more on target than they ever imagined.

One thing is official: while a slowdown in ad spending may have affected everyone else, it did not affect Google (GOOG - Annual Report). Yahoo! Finance reports:

The performance surpassed analyst estimates by a whopping 20 cents per share and underscored the Mountain View-based company’s widening advantage over its main Internet rivals.”The difference between Google and the second and third place players has become enormous,” Global Equities Research analyst Trip Chowdhry said. “This definitely shows that Google is going to own the next generation of the computing environment.”

Most companies find it increasingly difficult to sustain their growth pace as they grow larger, but Google so far has been able to defy conventional thinking.

The question now is whether to consider Google’s addressable market to be online advertising spending (in which case the company has little room left to grow) or total advertising spending (in which case the story has hardly even begun.)