Yesterday, Google's stock hit a new all-time high. It's up again this morning.
These moves cap an extraordinary run in which Google's stock has surged more than 30% since July, when it traded around $560.
So, what gives?
Why is Google flying?
I did an informal survey via Twitter yesterday, and here's what I heard back (combined with some of my own thoughts):
- Motorola is proving to be less of a disaster than people expected (and Google is selling off some of the really crappy parts)
- Everyone is realizing that Facebook isn't really a threat to Google's core business and that Facebook is not "the next Google."
- The core business, search, is still growing like a weed.
- Android, Google's mobile operating system, is the world leader, and it continues to gain market share at almost everyone's expense.
- Android-based phones are finally as good as Apple phones, and Google's new tablet has also gotten rave reviews.
- Founder and new CEO Larry Page has re-energized the company.
- Stock-market investors are starved for "Growth At A Reasonable Price," and Google's stock provides that
- Money is rotating out of Apple and into Google
Now, none of those reasons alone is enough to drive a big stock like this up 30%, but taken together, they're good news.
The real driver of Google's stock, of course, is the ongoing strength of the company's financial performance.
Five years ago, when Google's stock was on fire for the first time around, I suggested that it could eventually hit $2,000 a share. The "eventually" in that case was defined as "a couple of decades," which is a very long time period (and which actually wouldn't lead to a very compelling long-term return).
In sketching out that analysis, I made some back-of-the-envelope cash flow projections. Five years later, it's interesting to look back and see how things have progressed.
The most surprising thing about Google's performance over the last 5 years is that Google's cash flow is grown even faster than I thought it could. The stock's multiple has compressed, but Google's business has delivered more than most people expected it could, so the stock has done well despite the lower multiple.
In 2007, when Google first crossed $700, the company generated just over $3 billion in free cash flow.
This year, Google should generate at least $12 billion.
That's well ahead of where most people imagined they would be by now.
To put the $12 billion in context, it's more than twice Facebook's revenue (let alone cash flow).
It's also more than all but a handful of companies on earth. And it comes despite Google investing in a bizarre array of projects that have nothing to do with its core business, including self-driving cars and wind power.
So, here's to Google for putting up such extraordinary numbers.
Relative to the ~$12 billion of cash flow, the stock is now a bit pricey--~20X cash flow--but it's within the realm of reasonable.
SEE ALSO: October 2, 2007: Google To $2,000?
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