World Economy

Google Inc.’s stock got a strong bounce Friday following the company’s second-quarter results, though most analysts who cover the Web search giant say its shares remain undervalued.

By midday, the shares traded up more than 12% to nearly $595 — having touched $600 briefly after the open.

The gains put the stock back into territory it held before the company’s last earnings report in mid-April, when higher-than-expected expenses caused a selloff. The stock previously traded above the $600 mark in early March.

Late Thursday, Google GOOG +12.92%reported a 36% jump in net income for the second quarter, as revenue growth topped Wall Street’s expectations thanks to strength in the company’s core advertising market. Google also moderated the growth of its operating expenses, which comprised 33% of revenue in the second quarter compared to 39% for the March period.

“There are very few negatives to point to in one of Google’s best quarters in three years,” wrote analyst Ross Sandler of RBC Capital Markets in a note to clients, in which he boosted his price target on the stock to $790 from $680.

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Google soars after quarterly results

Google's shares soared after a strong earning report, based in part on ad sales although the company still faces strong competition from rivals.

Still, Google’s shares remain below nearly every price target set by analysts, and about 19% below the current median target price of $730.

Its current valuation multiple, about 15.9 times estimated earnings for the next four quarters, is near a record-low — even below that of smaller rival YahooYHOO +0.81% , which trades at 18.3 times estimated earnings, and well below other Internet peers such as Amazon.comAMZN +0.40% , which trades at more than 75 times earnings.

Newly public social network LinkedIn LNKD +3.38% , which competes with Google’s new Google+ service, trades about 325 times estimated earnings for 2012; the company is still expected to generate net losses for the next four quarters.

Scene’s set for multiple expansion

“We think these circumstances should allow Google shares to move from the 10-15x earnings multiple range back up to the 15-20x range,” Sandler wrote.

Several analysts noted that the company’s past investments to diversify its revenue base away from search ads seem to be bearing fruit. While Google didn’t disclose specific metrics for revenues coming from segments like YouTube and its Android mobile operating system, analysts said at least part of the top-line growth appears to be coming from these newer segments.

Reuters

Google CEO Larry Page.

“Google’s investment strategy appears to be paying dividends, with new initiatives (Android, Chrome, AdX, YouTube, Local, and Plus) driving a higher growth rate in 2011 than in 2010,” wrote Jordan Rohan, analyst with Stifel Nicolaus. He maintained a $750 price target on Google.

Analyst Ben Schachter of Macquarie Securities wrote that the shift to mobile Internet access appears to be benefiting the company, writing that “we think more investors will agree that the aggressive investments are sensible and that the strategy is sound.”

Most of Wall Street’s bullish on the stock, with 87% of brokers rating the shares as a buy. Those with a less-enthusiastic view note that Google continues to face uncertainty over the massive growth of social network rivals such as Facebook and the competition in the mobile market from Apple Inc. AAPL +0.77%

“The return on Google’s prior investments (Mobile, Display) have been very good, but the return on Google’s new investments (Social, Commerce and Local) are still uncertain — and the social investments ARE catchup defensive,” wrote Citigroup analyst Mark Mahaney, who bumped up his price target to $690 from $650 but maintained a hold rating.