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Just three short weeks ago, on Aug. 31 as Google was trading at $450 a share, I wrote in my Revolution Investing newsletter, “my single favorite trading idea for now into year’s end is simply buying Google calls with a $500 strike price that will expire sometime in 2011. Google’s set to explode as earnings leverage increases, as its search takes yet more market share, and as mobile ads and Google TV and more come together for the company.”
Those calls have all more than doubled in the last three weeks since our subscribers got that note. Yup, despite all the comments on all my recent blog posts about the iPhone is clearly a better phone than any Android (at least right now!) which accuse of me being an Apple-fanboy, a Google-basher and so on, the facts are that I actually think both Google and Apple are must-own stocks for the App Revolution and we’ve been making my readers a ton of money on the trading strategies I’ve been detailing on Google and Apple.
If you are one of the lucky folks who made the Google calls trade and/or bought the Apple like dell Inspiron E1505 battery , dell Inspiron 1501 battery , dell GD761 battery , dell KD476 battery , dell TD347 battery , dell Inspiron 1000 battery , dell Inspiron 2200 battery , dell 312-0292 battery , dell INSPIRON 2600 battery , dell INSPIRON 2650 battery calls that I also recently recommended here on this blog and which have themselves almost doubled since I wrote about that trade, I think you probably ought to sell half. In this week’s newsletter, I also explain how you can create what’s called “positive gamma” for your portfolio by shorting the common stock against those calls, but either way, I think you take some money off the table right here, right now on either Google or Apple. They’ve each rallied about 20% in the last month, so I’d expect we can get a bit of a pullback in these two stocks (along with the broader markets, but with higher beta) in the very near-term.
But guess what? I already told you that I think Apple can get to $1000 by 2015 (and to $350 a share by the end of the year too, which I still think will happen). Well, I also think that Google’s going to get to $2000 by 2020. Yes, I’m serious with these bubble-esque type price targets. Here’s why.
Of all the revolutionary trends we can find to invest in, including the mind-blowing socioeconomic achievements we are witnessing for hundreds of millions of people who are becoming middle-class, there’s not a trend in the history of the world that has shown the growth and ultimate marketplace size as the whole App Revolution has.
See, all those hundreds of millions of people who are becoming middle class along with the billion or so already in the developed world have one big thing in common — they’re just now starting to use app-enabled smart phones.
There were just over 50% of the people in the developed world that had a cell phone just over 10 years ago. More than 80% of the people in the developed world (which remember is itself growing) had a cell phone in 2010. But, of those billions of people who now have a cell phone in 2010, less than 25% of them are using smart phones and a smaller percentage of that are using apps on their smart phones. By the year 2020, more than 90% of the more than 1.5 billion phones that will be sold around the world that year will be smart phones.
We’re talking about a marketplace that growing from just over a hundred million smart phone consumers to 1.5 billion smart phone consumers in just a few years’ time. That’s a marketplace that already has 100 million people in it and is going to grow more than 50% per year annually for the next decade. The overall cell phone industry will only be growing 5%-10% per year over the same time period.
One of the truer purer-plays on the App Revolution is Google. Google’s Android, while still not nearly as good overall in performance, ease-of-use, and battery-life as the iPhone (I’ve owned and played with many of each over the last year), has mind-boggling growth ahead of it. And like most of Google’s best businesses, it’s got huge profit margins, low reproduction and distribution costs, lots of disparate revenue streams and … did I mention something about growth above? Huge growth.
And there will likely be three major platforms battling it out for most of the 1.5 billion app phone buyers in 2010 — Symbian (driven by Noka), Android (driven by Google) and iPhone (driven by Apple). There will be other platforms, but it’s looking increasingly every day that they will be on a much smaller scale — Microsoft and Blackberry and perhaps HPQ’s Palm, etc. Nokia’s Symbian system will also grow. (Find out how we’re trading Nokia in the Revolution Investing model portfolio by reading my recent newsletter dedicated to trading Nokia).
So what about bottom up analysis for Google? The stock’s cheap, with an enterprise value now at less than 15-times next year’s earnings. And ten years from now those earnings will be much higher than they are here as Google’s mobile businesses will be generating more income than their standard Internet businesses will be.
Google’s already in the Revolution Investing portfolio, and right now I’d be patient about this stock, but I’d look to at least have a toe-hold in the name and I’d also look to be adding more weighting and/or buying long-term anytime the stock sells off and/or remains below $500.