Google plays in a lot of different spaces, often quite well, but it has not been without its missteps. The digital information provider industry has been an evolving business since the inception of the Internet, with Google leaving a number of would-be-competitors in the dust. The digital landscape is littered with former powerhouses that are now also-rans.
In a December 16 U.S. search engine ranking by Bloomberg, it was reported that for the six months ending November 2011, Google captured 65.2% of the search share while Yahoo! (YHOO) captured 17.3%. Microsoft came in at only 13%, even after a major push for its Bing search product. AOL (AOL) has not died off quite yet, capturing 1.3% of the search market.
Yahoo! is in turmoil as CEO Carol Bartz was ousted in September, a new CEO has yet to be found, and a consortium of Microsoft and Silver Lake (a private equity firm) are trying to hammer out terms for purchasing a 10-15% stake in the company.
For now, it appears that Google has conquered the search world, and will likely continue to see marginal share gains as Yahoo continues its downward spiral. Of course, all of this search share is just a means to being able to deliver customized ads to more users.
Google has a number of other platforms on which it can deliver advertising content to millions of users. YouTube, which Google purchased in 2006, has no major mainstream competitors. Google reported in third-quarter 2011 that Google+ has amassed 40 million users since its public launch in June, a far cry from Facebook’s reported 800 million active users, but significant nonetheless. Those customers appear to be using the platform, having uploaded 4.3 million pictures to the service. However, it is yet to be seen if Google can win significant social networking market share as consumers have grown accustomed to Facebook since the fall of MySpace. The history of social media, particularly MySpace, also reminds us of how quickly the mighty can fall.
Google is also going head-to-head with Apple (AAPL) in the smartphone market, primarily through its open source Android operating system. Nielsen reported that in quarter three, the Anroid operating system captured 43% of the U.S. smartphone market, compared to a 28% share for Apple. According to a Google press release in August, Google will expand its smartphone footprint in 2012 by purchasing Motorola Mobility (MMI), after the apparent sales failure of Google’s own Nexus One handset. Up to this point, Google has used its operating system as a way to drive customers to ad content. The competition with Apple also recently expanded into the small computer space as Google released its Chromebook, a product that occupies a yet-to-be defined space between tablets like the iPad and laptop computers. Apple and Google are both heading in the same direction, though, as both the iPad and the Chromebook push us towards cloud computing.
Going forward, it is likely that Google’s primary competitor will be Apple. Both companies are innovating in the same space-a space in which Apple may be a little more comfortable. Apple is driving its business with innovative products on which it can sell content, primarily through iTunes and the AppStore. Google’s model is somewhat different. It provides digital platforms as a means to drive ad revenue. However, in the end, both are fighting for the same customers, particularly in the smartphone space.
Google and Apple had similar third-quarter profit margins at 27% and 24%, respectively. Year-over-year earnings growth for Apple has been exceptionally high at 54% while Google earnings have grown at a more-than-respectable 26% year over year. Both firms have similar historical risk with betas around 0.85. So, it is a bit surprising that the P/E for Google is about 23 while Apple’s P/E lags behind at just under 14.
However, given its growth prospects, Google does not seem underpriced. If anything, Apple may be underpriced. Baidu (BIDU), a Chinese search company, trades at 44 times trailing earnings. Baidu does have higher near-term expected earnings growth, which likely drives this high valuation. But given Google’s robust growth prospects, I would put a near-term price target on Google of $725, well above the current range of around $625. Risks to this estimate include the fiscal and monetary turmoil in Europe which may adversely affect Google’s substantial international business and its ability to hold onto or gain market share in the smartphone space. Of course, finicky consumers can derail a tech company faster than any of these things.