In the last seven-year period, Google results have been stunning. EPS went from $2.51 to $43.94 per share. In the last five years, earnings grew at an average of 27%. Finally, earnings in the last four quarters have been 33%, 32%, 27% and 26%, respectively.
In terms of future expectations, analysts consider that Google's future has much more to give. Earnings are expected to grow 19% year over year. Now, GOOG is profiting from a PEG ratio with a forward P/E of just 14.7. The PEG ratio is currently 0.78. If Google can trade at $43.94 per share next year and earnings increase by 19% year over year over the next five-year period, then shares may be trading at $88.38 per share five years from now.
Google represents 60% of the market in terms of searches. No competitor can live up to it as it does not even reach 10% of the share. Apart from the search engine and advertising, Google is now expanding to cloud computing, computing, cloud based applications, mobile, social, content, etc. There are now many investors who are looking at these technologies. If Google can provide an interesting offering in each segment, it will be uniquely positioned to bring all these together.
Most importantly, Google has launched a music store that does not only allow users to download music but it also allows them to store the music in a library. Moreover, independent musicians can manage a page through which they can sell their own music directly to consumers. Of course, this music store is not as robust as Apple's iTunes.
Apart from the music store it has launched, Google operates Android, by means of which it has entered the mobile phone arena. Google is No. 1 in smartphones, thanks to Android. Android dominates the environment with 50% market share due to the success of its smartphones and tablets. Although Apple has been able to bridge the gap between the two with the launch of the new iPhone 4S, Android does not have to worry.
In terms of sales, Google cannot be beaten. It represents 65% of the market and Yahoo (YHOO) cannot surpass it. Indeed, the search engine is the one that provides the highest revenues for Google. Another important source of income Google has is Google TV. Google TV is beginning to develop to gain acceptance. Its announcements were presented at the Consumer Electronics Show in Las Vegas. YouTube shares revenue with top videos and Google is trying to introduce films to move away from homemade videos.
Unfortunately, although Google has many pros, it also making wrong moves. For instance, it is investing in less competitive businesses which may deteriorate its operating margin and return on capital. These less profitable investments may cause customers to move to competitors and may cause advertisers to turn to other ways to reach the audience in a cost-effective manner. An example of such an alternative source is Facebook. Last but not least, competition is fierce and now Google is facing copyright infringement cases pursued by regulatory agencies that may distract management and result in monetary penalties.
But, let's take a look at Google's quarterly results to see how it is performing. Financially speaking, Google is healthy. It has reported strong revenue, strong earnings and cash flows. Revenue increased 33% while net income increased 26%. Mobile, in particular, generated $2.5 billion in revenue. Google reported net income at $2.73 billion or $8.33 per share, which involves an increase from the prior year. Third-quarter profit was $9.72 a share, thus exceeding analysts’ expectations of $8.74.
Revenue climbed from $7.29 billion to $9.72 billion and net revenue grew to $7.51 billion, up from $5.48 billion. By contrast, operating margin remained stable at 31%. Analysts maintain positive expectations about Google, particularly based on the heavy investment in mobile Android environment and Google+.
Regarding shareholders, Google has been generating economic value for them. How can it be assessed? By comparing the company's ROIC with its weighted average cost of capital. The gap between the two is called economic profit spread. Google's, ROIC is 101%, which surpasses the estimate of its cost of capital of 11.7%. It is expected that ROC will expand from 108.5% to 133.3%. In terms of future expectations, free cash flow margin is expected to average 27.8%. Total debt-to-EBITDA was 0.3 last year and debt-to-book capitalization stood at 7%.