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Google: An Attractive Buy After a Historic Split.

April 27, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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When one of the leading heads of a company like Google (GOOG) makes a sudden exit with immediate effect, it definitely stirs up some questions in the minds of investors and analysts. I am talking about the exit of Google’s social segment’s chief, Vic Gundotra, who worked for and championed the social World at Google that led to the birth of Google+.

Though the social service by the company failed to catch up with its foremost rival Facebook yet it gave a good entry point for the giant to social networking. In October 2013, Vic said that 300 million users visited Google+ web page every month which compares with around 1 billion+ users on Facebook page on a monthly basis. While Gundotra cited a story related to life’s priorities behind his exit, it will be interesting to see the developments in G+ social network under a new boss in the future.

First quarter results: Slightly off track

Besides this high profile exit, Google was also under the scanner for its quarterly results reported a few days back. The company reported considerable results for first quarter of 2014 as revenue surged across the board on year over year basis. Total revenue came in at $15.43 billion, a jump of 19.2% over the year ago period while Traffic Acquisition Cost (TAC) was reported at 23% of advertising revenues. Though the results reflected significant growth compared to the first quarter of 2013, the Wall Street was slightly disappointed because of a marginal sequential fall in revenue. While the revenue slid slightly compared to fourth quarter of 2013, Google managed to achieve better operating margin because of better cost control mechanism.

A smart split

Google is known to build smart solutions and that is not just limited to its technology but extends to majority of its decisions and strategies. The recent stock split that the company had kept planned for a long time was finally executed in the month. As a result of the split, the head trio i.e Larry Page, Sergey Brin and Eric Schmidt have not only cemented their grip over company’s controls but also created a currency that would be used to pay for the company’s inorganic growth. Since the Class C shares will not enjoy voting power, the effective control of the company will remain with the founders.

In a way, this stock split will benefit the investors in the long-run. One primary reasoning is that Google has grown to become an Internet behemoth because of its acquisitions. May it be Android, Youtube or another of Google’s highly successful products, they have come under its umbrella via takeovers. Hence, this split will enable Google to make stock-based deals with prospective targets that would not only save company’s cash pile but also create massive opportunities for the future.

Additionally, Google has performed extremely well because of less interference by shareholders as it has been able to take decisions with ease. For example, the company realized that it might not be able to turnaround its ailing acquisition, Motorola mobility division and hence, quickly amended its decision by selling the division to Lenovo for a sum of $2.91 billion. Thus, Google’s stock split is definitely going to be favourable for the shareholders of the company in the long run. Read an interesting analysi of the split here.

Building presence in Cloud

It is beyond doubt that the future of technology is in cloud computing and big tech giants like Amazon (AMZN) and Apple (AAPL) are massively investing to harness its power. Google is also not lagging in this race as evidenced by its earnings call. The company reported an investment of more than $2.3 billion dollars in cloud computing in the quarter, a large chunk on building and filling data centers. This is the third consecutive quarter wherein the company has spent more than $2 billion on cloud in order to build a robust presence. In nutshell, this humungous investment in cloud is at the core of Google’s strategy as it works towards integrating its products and improve user experience. While there is a horde of big players in the market, Google’s investment in cloud infrastructure will give it good leverage.

It is quite prudent for the company to build a robust network of servers and datacenters in order to run the farrago of services offered by the company. Additionally, Google’s objective of seamless integration of its services across all types of devices can be achieved on the back of a sturdy infrastructure.

Final thoughts

Besides being highly optimistic on Google’s future with cloud computing, I would also recommend investors to watch out for the performance of Google’s display ad network, especially Youtube. As pointed out by the management in its earnings call, Youtube is becoming a favourite for advertisers who want to achieve scale while constraining effective costs. For example, in 2013 most of the Super Bowl advertisers turned to Youtube where their ads have been watched over 300 million times, roughly three times the size of audience that watches ads on TV.

Hence, I would maintain a strong buy for Google because of its building momentum in cloud computing as well as growing popularity of Youtube among big ticket advertisers.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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