With dwindling competition from other search players such as Yahoo (NASDAQ:YHOO) and AOL (NYSE:AOL), Google’s (NASDAQ:GOOG) stock has seen a 7%-8% rally in the past week, [1] just prior to the company’s Q3 2011 earnings release on 13th October. Given that Google has remained robust in its core search business despite macro-economic volatility, the third quarter might be seeing steep stock gains for the company, much like the beginning of Q2 2011.
See our full analysis for Google’s stock here.
Google’s Stock is Gaining on a Strong Search Business and Strategic Acquisitions
The third quarter has seen Google maintaining and even growing its lead in the search market. The company has increased its U.S. search share from around 64.5% in June 2011 to around 65.3% in September 2011, [2] consistently pushing down market shares of languishing competitors such as Yahoo. It seems that these trends have boosted investor optimism, who are anticipating top-line advertising growth similar to the 30%+ revenue growth in Q2 2011. [3]
Google has also seen benefits from a slew of strategic acquisitions made in the last 3 months, including the large-scale acquisition of Motorola Mobility (NYSE:MMI). While the acquisition certainly poses future challenges for Google, investors seem to be comforted by the fact that Google is high on cash and is willing to invest further in expanding its reach in the mobile device/OS market. Other important initiatives such as Google’s purchase of Zagat and the launch of Google Wallet can further pacify investors on similar lines.
Stock Rally Might be Short-Lived as Legal Challenges Persist
However, Google’s legal hurdles can continue putting pressure on its stock. Despite its continuing reign in search, the company’s stock has actually slid from +$600 right after its Q2 earnings release, to a little over $500 last week.
While this was largely a result of a deteriorating economic environment in the west, Google also dealt with a number of patent-related issues including signing of a licensing deal with Microsoft as well as an on-going anti-trust probe by the Federal Trade Commission (FTC). These issues are expected to sting Google for a few months to come, suggesting that the current stock rally might be short-lived.
We currently have a price estimate near $600 for Google’s stock, which is roughly 10% above the current market price. You can drag the trend lines in the modifiable charts above to see the impact of these trends on Google’s stock value.
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