This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Opportunity missed?
When Google (NAS: GOOG) reported its earnings miss in January, and its stock plunged 8.5% in a matter of minutes, did you pounce on the opportunity? Did you catch the rebound, and ride the wave back north of $620? If not, don't fret. Because according to the analysts at Nomura Securities, there's more where that came from. According to Nomura, Google's going to $750.

In a bullish research note yesterday, Nomura was practically drooling over the prospects for profit at Google. The company that owns "6% of the global advertising market" today is likely to near-double its market share over the next five years. Google's core business in Internet search will do even better, capturing "nearly 80% of the market, or $66 bn in total search revenue by 2016."

What about Baidu?
Now, this is not to say there are no threats to Google. Over in China, for example, there's this little company called Baidu (NAS: BIDU) -- maybe you've heard of it? It's got a lock on a 1.3 billion-person market. But a Fool can wonder if that number's a coincidence.

After all, 1.3 billion is just a hair under 20% of the globe's 7 billion-person population. And if I'm reading these numbers right, what this means is that Nomura doesn't see Baidu ever expanding significantly beyond Chinese borders to challenge Google internationally. (Which stands to reason. I mean, if you've got a choice between one search engine that gives you the world on a platter, and a second known best for helping maintain the Great Firewall of China, which service would you patronize?)

Granted, this still leaves Microsoft (NAS: MSFT) , Yahoo! (NAS: YHOO) , and their Bing venture to contend with. But here again, Nomura's projection of an 80% market share for Google suggests the analyst sees these competitors gradually withering on the vine -- rather than sending out shoots to steal business from Google. Once you net out the market share going to Google and Baidu combined, there's basically nothing left over for either Mr. Softie or Yahoo!

As it turns out, the only company that Nomura believes can give Google a real run for its money is Facebook: "The biggest threat to Google is a strong social network offering an effective search product." However: "that threat hasn't arrived." (Although its IPO is just around the corner.)

Android army on the march
Nomura isn't alone in its enthusiasm for Google. In fact, at the same time as it was publishing its research, comScore issued its latest update on trends in U.S. mobile phone use. Turns out, while rival Apple (NAS: AAPL) is still growing and stealing market share from rivals Microsoft and Research In Motion, Google's growing even faster than the iBehemoth. In the three-month period ending in January, comScore clocked Google's Android operating system at a 48.6% market share among smartphone subscribers. That was more than 19 points ahead of Apple. What's more, Google's market share grew more than 50% faster than its rival, up 2.3 percentage points from where it stood in October.

Valuation matters So a bit like Charlie Sheen, Google appears to be "winning" on all fronts. But what's the price of this success, and should we pay it? With $9.7 billion in trailing earnings, Google shares sell for 20.5 times annual profits today. That's only a bit ahead of consensus estimates of 18.2% long-term profits growth at the company, suggesting that at worst, Google shares are modestly overpriced.

In fact, though, you can argue that Google is a whole lot cheaper than it looks. Back out Google's $37 billion in net cash, and value the company on the free cash flows it produces (which are 14% richer than its reported earnings suggest), and the enterprise value-to-free cash flow ratio on this stock drops all the way down to 14.4.

Foolish takeaway
So what's the upshot of all these numbers? A quick back-of-the-envelope scribbling suggests that Google is today selling for about 21% less than its true worth. And if you reverse that calculation, this suggests that the "correct" price on the stock is roughly $730 a share -- within a whisker of the $750 price target that Nomura just set for Google. Long story short, I believe the analyst is right on the money with this one.

Post-earnings, and post-earnings-sell-off, Google is finally buyable again. And right now, this instant, I'm going to back up those words by heading over to Motley Fool CAPS to rate this stock an "outperform." Think I'm wrong? Follow along.

By the way -- you don't have to own Google to profit from its success. Read our new report and we'll tell you about three otherHidden Winners of the iPhone, iPad, and Android Revolution. The report is free -- but for a limited time only.Click quick.

At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 352 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Yahoo!, Microsoft, Apple, and Google.Motley Fool newsletter serviceshave recommended buying shares of Apple, Microsoft, Yahoo!, Baidu, and Google, as well as creating bull call spread positions on Microsoft and Apple.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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