Eminence Capital Bullish on Google: Q2 Letter Excerpt ~ market folly

Tuesday, September 11, 2012

Eminence Capital Bullish on Google: Q2 Letter Excerpt

Ricky Sandler's Eminence Capital is having a good year as they finished the second quarter up 0.1% net and year-to-date at that time were up 14.8% net.  This beats the S&P which returned 9.5% over the same period.  In his second quarter letter to investors, Sandler explains why he likes Google (GOOG).

The search engine giant is currently their largest long position at 10% of equity, but they also own out of the money call options so adding in this delta-adjusted exposure gives them a 15% position.

The Q1 issue of our Hedge Fund Wisdom newsletter back in May (get it for free here) highlighted that GOOG was a consensus buy among hedge funds in the first quarter as shares dipped from $660 down to $565.  After trading down/sideways in the second quarter, GOOG has ripped to new 52-week highs of $695 in the current quarter.

Why Eminence Likes Google

Sandler calls GOOG "one of the most compelling investment ideas we have ever seen" as he believes fundamentals will accelerate (though he also notes he's expecting near-term outperformance in the letter dated August 13th.  Since then, GOOG is up just over 8%).

He points to the company's large moat in internet search as very attractive and also highlights the company's Adwords product as compelling as it provides a high return on investment for their customers.

The Eminence founder goes on to write,

"Despite its maturity, Google is still growing revenue at 25% per year in large part due to continued improvements Google is making to the product and the ongoing secular shift of advertising from offline to online.

In addition, Google has underappreciated new advertising platforms in mobile, display and video that are approximately 10% of net revenue and are growing at 100% annually. We expect these tailwinds to help the company continue its revenue growth at very high levels and to become increasingly visible to investors. In total, Google trades 10-11x our estimate of economic earnings for 2013 (ex-cash and after stock compensation expense), a staggeringly cheap multiple for a company that is growing as quickly and is as well positioned for the future as Google."

For excerpts from other Q2 hedge fund letters, we've also posted up why Bill Ackman sold Citigroup.

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