Yesterday afternoon was an odd one for Google, Inc. (GOOG) stock and an embarrassing moment for the NASDAQ Exchange. We noted right away—as I am sure many in the investing community did—that GOOG was tanking right before the close. Around the office people began to wonder about hedge funds or other institutional investors liquidating their positions at the quarter end. We speculated that value investors would be drooling over Google at the quoted prices; depending on the source you trust, GOOG actually got down to $25.80 (CNN Money) or even one penny (Reuters)!

As it turns out, it was all much ado about nothing. It was a major glitch, as a spokeswoman for NASDAQ (NDAQ)explained, “A market participant sent in a large number of orders and drove the price down at approximately [3:57p.m. ET] which caused the bid-offer to be artificially low due to their mistake.” It’s funny that an exchange which is exclusively electronic would blame a participant for the mistake instead of the entity that allowed the trade to occur. Anyway, the erroneous trades are being wiped out and NASDAQ set the closing price of GOOG for September 30, 2008 at $400.52, slightly above where it began the day. Aren’t computers supposed to make market trading more efficient?

Back to reality, GOOG shares in the low $400 are too cheap to ignore according to our methodology. We, at Ockham Research, are huge fans of Google’s products which are indispensable to our daily workflow. Google is one of those iconic brands whose name has become a part of speech. One does not search the web anymore; it’s simply referred to as “googling”. Other brand names that come to mind which have entered the lexicon of business are Xerox and Tivo.

Google is now so much more than a search engine. The company is constantly expanding into new territory, such as: its new web browser Chrome, the Android platform for its G1 phone and even a partnership to explore alternative energy with General Electric (GE). We do not know whether these products will eventually become dominant market players, but they are interesting prospects. We wish Google all the best—especially in finding cheap and clean energy sources—but as an investor, we prefer to ponder observable successes, such as that which GOOG has enjoyed with its search engine. Internet users are searching the web more than ever. A Pew internet usage report from 2002 showed that only 33% of internet users utilized a search engine daily; in 2008, that number is almost 49%. That is half of every internet user every single day! Google is gaining market share in search engine usage as well. On many months, Google gets a dominant70% of all searches versus competitors Yahoo (YHOO) and Microsoft (MSFT). This equates to more revenue via its core business of internet advertising.

In terms of valuation, $400 per share may sound pricey but it clearly is not based on historical valuation ranges. GOOG has fallen rather rapidly during 2008 from its high of nearly $750 in November 2007. That’s a drop of 46%, yet its revenues continue to grow. Furthermore, on a Price-to-Sales basis, GOOG has normally traded between 8.65x – 16.1x in its short history. However, the current Price-to-Sales metric looks cheap in comparison at 6.9x. Similarly, Price-to-Cash Flow, which is currently 22.2x, has historically ranged from 29.4x – 55.8x. Being a value shop, we rarely find such great growth stories this undervalued. We have awarded GOOG an Undervalued rating as it has been over-sold in this market and we think it is reasonable to expect GOOG to rebound into the mid $500’s going forward.