Google (GOOG), the Internet search engine, is generating revenue with only the users’ clicks or the advertising related to their searches. Indeed, this activity represents 80% of its revenues. The remaining revenue is driven by advertising that Google places in other companies' websites, and by smaller initiatives.
Furthermore, the last thing Google has done is to launch its music store which consists of a music download store and a cloud-based digital locker to store music.
Google is also investing in the mobile arena. In regard to this new initiative, it has purchased Android, a small software company allowing handset manufacturers and users to load applications from software builders.
This is really exciting. The move Google is making protects its economic moat and provides new revenue streams. Furthermore, the purchase of Android and its access to the smartphone market involves more consumers.
Searches are generating 20 billion clicks per month that are translated into billions of dollars and are setting the stage for building a strong portfolio for users and advertisers. This sound portfolio enables Google to continue growing and positions it in a more defensible place in the Internet segment.
Don’t forget Google represents 60% of the search market share in the world.
Google’s dominance is spectacular, despite the efforts of competitors, such as MSFT and Facebook to gain a share of the market. Actually, Google is growing its presence in Asia, a fast increasing market. According to Mark Mahaney, Citi analyst, GOOG has improved its Asian strategy and now it is starting to grow again.
Although some competitors like Yahoo are claiming that they have surpassed Google in display advertising, the evidence has shown that the company generated $2.5 billion in display advertising, exceeding the display revenue of the former.
I expect it will continue to aggressively participate in the market. Google is giving a try to DoubleClick Ad Exchange to include real-time bidding, thus attracting specific populations. Furthermore, it is investing in its YouTube website too. This video content website is growing very quickly and Google expects that this increase will be shown in its quarterly results.
And now that these quarter results have been mentioned, let’s take a look at them. Every investor is interested in figures.
To start with, Google’s balance sheet shows $35 billion in net cash with only $4.2 billion in short and long-term debt. Sales have reached $97 billion.
This growth is not only boosted by the search engine, but it is also driven by bets on mobile advertising and display ads.
In terms of shares, Google earned $9.72 per share, $1 a share more than what analysts have expected.
Joe Bunner, of Argus Research Company is very clear: “Google’s results really show how the company is making progress in its expansion. Google should be in every investor portfolio”.
And he is definitely right. Despite the fact that now the company is investing in less competitive businesses, thus reducing the operating margin or the return on earnings and competition is fierce, the results clearly demonstrate that Google still takes the lead.
Indeed, in terms of valuation, the fair value estimate is $744 per share, which represents P/E multiple of 27 and an EV/EBITDA multiple of 27. Revenue is expected to grow nearly 15% per year in the next five-year period. It is really astonishing. Moreover, Google reports earnings in this three market segments: Google websites, Google Network websites, and other small segments.
Google websites generate revenue that is driven by its search engine and web properties like YouTube.
Although minor short-term losses of the market share are expected, there will be an overall growth that will help revenue increase. What’s more, the mobile search segment will go through an upward trend.
What about Google Network? Expectations are not as great as in the case of Google websites. Google Network represents revenue earned by placing ads on others websites. For 2015, the increase rate is expected to be at only 8% with operating margins below 30%.
Regardless of these minor headwinds, Google is doing great. Bunner says “Google is superb. There is no match for it in the whole market.”
Now, what about management? A company that is doing great ought to be well managed. Is this the case of Google?
The current CEO is Larry Page, Google co-founder who was elected to manage the company after its predecessor Eric Schmidt decided to focus on lobbying activities in New York. Schmidt was a very good CEO. Indeed, during his office Google defined its business model, became public and stayed in the front line of the advertising industry with the largest revenue and best enterprise value.
The company’s equity has a dual-class structure that concentrates the voting power in its three executives, namely Schmidt, Page and Sergey Brin. Furthermore they hold 15% of capital thus, aligning management and shareholders’ interests. This is of particular importance when thinking about investing. Almost every Guru that has tech exposure in its portfolio holds GOOG as one of the sector's top holdings.
Analyzing the stock valuation from a historical multiple valuation perspective, I can see that GOOG is in the lower valuation band in both its P/E ratio and P/S ratios. The stock is not close to its lowest P/E of 16 but it is not either too far away from there. Considering the Internet sector will keep growing, I view the shares as having a relatively small potential downside.
In a nutshell, Google is on the right path. Regardless of some problems which it surely will be able to solve, the results are incredible and are forecasting even better performance.
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