I’ll never forget the day I scored my first interview with the CEO of General Motors Co. (NYSE: GM).
This was in May of 1980, and I was brand new to Detroit. I’d been a reporter for all of 15 months – in fact I was by far the youngest journalist on the cutthroat automotive news “beat.”
And I’d landed a sit-down with the leader of one of the most powerful companies on earth.
I was seriously stoked … until I looked in my closet, and took an honest look at the single suit that I owned.
It was a bargain-basement suit. It wasn’t classy. It wasn’t something I could build a wardrobe around. And it wasn’t something I’d be taken seriously wearing.
I didn’t hesitate: I went right to the city’s best haberdasher, and bought an Oleg Cassini suit – one I knew would fit in well with GM’s button-down culture.
It cost me my entire paycheck, so the outlay was a bit painful. But the payoff was both immediate – and long lasting.
I was welcomed into that interview feeling like a million bucks. I left with a Page One story – and a newfound confidence that has accompanied me for the rest of my career.
The best investments in life are often like that: They may seem pricey – or even painful – when you make them. But they are actually “foundational” in nature – providing the kind of hefty and lasting payoff that you’d never get from a bargain-basement counterpart.
And today I’m going to show you a stock that can do for you what that Oleg Cassini suit did for me.
Decades from now, when you’re rich and look back … you’ll remember that this was the stock purchase that started you down that path to incredible wealth …
The Theory of (Stock Market) Relativity
I’ve shared this story with you for a specific reason.
So many times during my career as an investment analyst, author and journalist, I’ve had folks tell me about decisions that seemed small and insignificant when they made them – but that ended up having a major impact on their lives, careers or finances.
And the difference between success and failure was often quite miniscule. Many times, the decision to save a few meaningless dollars – to go the “bargain route” – transformed what could have been a grand … and massively profitable … success into an emotional and regrettable failure.
I don’t want that to happen to you.
In fact, I want to introduce you to a stock that I’m betting you’ve dismissed out of hand – and probably for one reason.
It has a very high stock price.
Before I do that, however, there’s a lesson that I want to share with you – one that I want you to remember.
A colleague of mine jokingly refers to it as “the theory of stock market relativity.”
The lesson: Just because a stock is high-priced doesn’t mean it’s expensive.
That’s because prices are relative to valuations.
Let’s say you have two stocks. One trades at $10 a share, and the other at $500 a share.
Most investors would say the first stock is cheap, while the second one is expensive.
But a closer look might tell us the opposite is true.
For instance, we might find that, despite its low price, the $10 stock isn’t cheap. The reason: It’s trading at 50 times earnings, while the underlying company is growing profits at an average annual rate of 4%.
In fact, this stock may have more downside risk than upside potential because it appears to be overvalued.
And if we scrutinize the $500 stock, we might discover that it’s actually cheap – trading at 20 times earnings even though the underlying firm is enjoying profit growth of 40% a year.
Having introduced you to this way of thinking, I want to introduce you to a stock that believe almost every tech investor ought to consider putting into his or her portfolio as a “foundation” for long-term profits.
At first blush, this stock will appear to be priced into the stratosphere.
But like that Oleg Cassini suit that seemed so expensive when I bought it, this stock will prove to be a bargain that richly rewards your shrewd decision-making for years and years to come.
The underlying company is a high-tech heavyweight that it is eating its rivals alive.
It is setting the agenda – and pushing the boundaries – in virtually all of the most-important growth areas of the tech sector today, including the Web, the Mobile Revolution, and Ultra-Broadband.
In fact, if you think back to the halcyon days of Microsoft, Intel and Cisco – and remember how those firms dominated the tech landscape for more than a decade – you’ll have some idea of what this company’s future is going to look like.
Except that each of those firms only dominated a single sector … and this firm has a stranglehold on several – and is going for more.
In fact, this company’s influence is so broad and growing that I’ve often counseled my readers not to think of it as a single company – but more like an ETF that holds a number of high-tech players.
Of course, I’m talking about Google Corp. (NasdaqGS: GOOG), a cash-rich company with extremely high profit margins – that just keeps going for more. In fact, despite its market cap of nearly $300 billion, it has grown sales an average 30% over the last three years.
The best way to explain why Google is such a good long-term play is to start with the success it’s had in the mobile arena – one of the high-growth areas of tech that we’ve been talking about here for months.
Making (Mobile) Waves
When Apple Inc. (NasdaqGS: AAPL) CEO Steve Jobs introduced the iPhone back in 2007, he turned the world on its ear.
And he left growing rival Google in the dust.
It would take Google nearly 18 months to even release its Android smartphone operating system.
In spite of Apple’s huge lead -and the iPhone’s status as a “cult” consumer device – Google was determined to come out on top.
And that’s just what it did…
A recent study by the market research firm Kantar pegs Apple’s smartphone market share at about 42%.
And despite having come out of the gate late, and having to make up for lost ground, Android now commands 52% of the market.
In its July 18 earnings report, Google said it has activated 900 million total Android devices with 1.5 million being turned on each day. I find that stunning – in fact, I view it as one of the single-most amazing stats in the high-tech universe.
Now, Google is gearing up to take the lead in tablets. If you had asked me two years ago how the tablet battle would come out I would have said without hesitation that Apple wins it walking away.
Not so today…
Google recently grabbed the lead of that market, too, according to market-researcher IDC.
During the first quarter of this year, Android tablets took 56% of the market. That’s up sharply up from 41% from the year-earlier period. Apple saw its share drop from 57% to 39% on the same year-over-year basis.
Google flat out played it smart. It forged a very shrewd alliance with Samsung Electronics Co. Ltd. (005930.KS), the Apple arch-rival that gets rave reviews for its smartphones and Nexus tablets.
This turned out to be a pivotal relationship. It gave Google solid entries for mobile products that are outselling PCs by a factor of nearly 5-to1. And when Samsung’s $400 million marketing blitz last year has gave the Korean giant the top spot in the North American smartphone market, it presented Google with bragging rights … and the leverage to get more growth.
Flush with this success, Google now plans to shake up the markets for both home entertainment and broadband Web access.
The Silicon Valley giant is rolling out the next generation of ultra-high-speed Internet. Known as Google Fiber, the technology relies on fiber-optic cables and advanced optical networking gear.
Google wants to become more than a high-speed Internet service provider (ISP). The firm is pushing its ability to deliver high-definition TV (HDTV) as part of its Web bundle.
Hollywood and TV firms are moving to what’s known as ultra-high-def (UHDTV), which has four times the resolution of today’s HDTV sets.
That much video and audio detail eats up a lot of bandwidth. Google’s response: fiber technology that delivers blazing speeds of 1 gigabit per second. That’s roughly 100 times faster than what’s available in the market today.
As I see it, Google plans to be the “one-stop-shop” Internet company. It will provide high-speed access and use that to help push its search-engine (and ad sales) capabilities.
This is one of the reasons I believe Google is a good long-term profit play. The fiber platform started in Kansas City and now has limited distribution. But Google is thinking years ahead as it establishes a foundation that will allow it to dominate this market.
Meantime, it’s working hard to unseat the undisputed leader in the hot trend of cloud computing, which is a term for hosted data services.
The Web-services division of Amazon.com Inc. (NasdaqGS: AMZN) dominates a sector known as Infrastructure as a Service (IaaS). The Internet retailer commands 36% of the IaaS market, which is right now the fastest-growing segment of cloud computing.
But Google is coming on strong. Independent online data firm Cloud Spectator says in recent benchmark tests Google’s servers ran faster than those from Amazon.
Ironically, as of right now, Google is barely a blip on Amazon’s cloud radar.
But if I were running Amazon, I’d be worried. Just look at what Google did to the iPhone and the iPad.
So let’s get down to the topic that most folks probably focus on – Google’s stock price, and its valuation.
The “Next Google”
Trading at roughly $903 a share, GOOG has what appears to be a very high sticker price.
But it offers a lot value for the money.
In this year’s second quarter, for instance, it grew earnings by 16% — the second straight quarter it grew that fast.
It generates nearly $11 billion in free cash flow (FCF) a year. It has a profit margin of nearly 21% and has grown earnings at an average annual rate of 17% over the last three years.
If we do some rough financial modeling (this is what the analysts up on Wall Street do … but they usually for their best clients before they do it for you), we can see that this stock is nowhere near as expensive as most individual investors fear.
At that growth rate I’ve just demonstrated, Google should earn roughly $55.00 a share by the end of 2015. If the stock still trades at roughly 26 times earnings, that would mean a price of $1,430 a share, an increase of about 58% from the current price.
In short, if you’re looking to find the “next Google” – just look at Google itself. The company is a monster, it’s in all the right businesses, and it has a well-demonstrated ability to execute.
Of course, I’m not saying you should put your live savings into Google.
But like my Oleg Cassini suit, this stock will act as a solid foundation that you can build upon – and that will allow you to move forward with the confidence that you will succeed … at every stop along the way.
Confidence builds wealth. And wealth builds confidence.
If we’ve helped you do that, then I’ll consider my work here as my latest successful stop.
Have a great weekend.