For the internet giant Google (GOOG, Financial) (GOOGL, Financial), which has grown to a phenomenal size within a span of just 15 years, things have not been going great. From the Google Glass news that grabbed media’s attention a few days ago to the reports that the company has been missing Street expectations, everything is taking a dig at Google’s value. In the last year that has been reasonably good for investors because of improving data on US economy, Google has seen considerable volatility. Owing to these ups and downs and competitive forces existing in form of companies like Facebook and Amazon, it is sensible to analyse Google’s future prospects.
A look at the past
In the third quarter, the company had gross revenue of $16.52 billion, revenue net of traffic acquisition costs (ex-TAC) of $13.17 billion, GAAP earnings per share of $4.09, and non-GAAP earnings per share of $6.35. Analysts had expected Google to earn $6.53 per share on a non-GAAP basis, on net ex-TAC revenue of $13.22 billion. In the sequentially preceding quarter, Google earned $6.08 in non-GAAP earnings per share, on ex-TAC revenue of $12.67 billion. The company reported that its average cost-per-click fell 2 percent in the period, a weakening in a key revenue source. However, pushing back against that decline was a 17 percent year-over-year increase in ‘aggregate paid clicks.’ So, while the amount of revenue that Google managed to extract from a click went down mildly, it sold more than one-sixth more compared to the year-ago quarter.
Quite like Amazon, investors have realized that Google has been failing consistently to deliver on the estimates. While the company sits on an incredible pile of cash (to the tune of approximately $62.1 billion at the end of third quarter) and has been experimenting with several moon-shot ideas, the stakeholders are now getting uncomfortable with the constant misses. Google has now missed EPS estimates in five of its past six quarters, and the latest miss was the largest in the past four quarters. The reason that this is similar to Amazon’s plight is because like Google, the ambitious Mr Jeff Bezos is losing the tight grip on investor confidence because of the disappointing results.
There is hardly any doubt that Google is a massive value-generating company and has done so for its shareholders via capital appreciation but the fact that it is not generating expected growth since past few quarters is not finding place with the investors. As a matter of fact, the split that Google orchestrated in April is responsible for investor woes to an extent. The dilution in shareholding has reduced the earnings per share and also, no probable buyback in future has kept investors concerned. As such, it is quite important that Google addresses its stakeholders by focusing on its core advertising business and creating growth on its bottom line.
Facebook is making things tough
While this is an ideal solution, it is not an easily achievable one. The quick-paced growth of Facebook’s (FB, Financial) advertising business has definitely raised concerns regarding Google’s dominance in this segment. As per this article, Google and Facebook’s domination of UK digital advertising has been underlined by the prediction that these web giants will hoover up more than half of the £8bn market for the first time next year. Thus, it is not hard to understand that the competition Google faces in form of Facebook will be a big hindrance for the company in getting back to its fast-paced growth in the advertising business. Facebook has a robust display and video ads portfolio and that has attracted a horde of advertisers and consequentially, the big bucks.
Recently, Facebook took another major step in its bid to offer its advertisers a better platform for advertising and tracking consumer data. The social networking giant announced the re-launch of Atlas, the ad serving platform it acquired from Microsoft in 2013. The goal of Atlas is to help publishers across the web prove the effectiveness of their ads in influencing purchase decisions both on and offline. Yes, you heard it right as Atlas can show what percentage of people who saw an ad actually made a purchase offline, which is pretty much the Holy Grail for advertisers. To do that, Atlas collects offline purchase information from advertisers and compares that list to its own data on who saw the ad online. The system uses things like users’ email addresses and names to determine if there are any matches between the two groups. In nutshell, the point I intend to drive home is that Facebook is using every available means to increase its share of the advertising market and therefore, Google needs to be aware.
Takeaway
In the past one year, Google’s share price has dropped around 4 percent owing to disappointing results and ambiguity with regards to moon-shot projects being pursued by the company. Though the decline is not much, it is still a bad news when associated with the rise in value of other tech companies. Trading at a multiple of approximately 21 times the forecasted 2014 earnings, Google is currently an unfavourable buy when compared to its peers.
