Google, the Internet search engine, is generating revenue with only the users’ clicks or the advertising related to their searches. Indeed this activity accounts for 80% of its revenues. The remaining revenue is driven by advertising that Google places on 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-base digital locker to store music. Independent musicians can manage a page where they can sell their own music directly to consumers.
Google is also investing in the mobile arena. This has been its last heavy investment. 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. In 2010, Android´s share of smartphone shipments jumped to 23% surpassing market leaders, such as Apple and Research In Motion.
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 that will certainly use Google services. Indeed, last year, estimates of Google´s market share in mobile search have exceeded 90%.
Positives and Risks
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.
Google represents more than 60% of the 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.
Google will leverage its dominant position in Internet search and support a steady growth in display and mobile advertising, which will allow it to meet industry growth rates or even exceed them.
Although some competitors like Yahoo and AOL are claiming that they have surpassed Google, the evidence has shown that the company generated $2.5 billion in display advertising, exceeding the display revenue of the former.
Google is expected to aggressively participate in the market. Google is giving a try to DoubleClike 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.
Still there are a few risks that Google may face. The growing presence of social networks, Facebook, Twitter and LinkedIn will not be an immediate threat to Google´s search business but will affect Google performance in display ads.
ROC for the new businesses will be lower than that of its core search business. Google will have to continue investing as many other companies are investing heavily in content strategies.
Indeed, consumers may move to a competitor that is able to establish a stronger brand and a more useful experience. Google is investing in less competitive businesses, which may lead to a deterioration in its operating margin and ROC.
Last quarter results
To start with, Google´s balance sheet shows $35 billion in net cash with only $4.2billion 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. Actually, Google´s Mobile Division is growing at a 150% pace and now represents $2.5 billion in revenue on an annual basis.
In terms of shares, Google earned $9.72 per share, $1 a share more than what analysts have expected. Shares have risen nearly 20%.
Joe Bunner of Argus Research Company is clear: “Google´s results really make an investor long to invest in it.”
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.
Google websites generate revenue that is driven by its search engine and web properties like YouTube. Although a short-term loss of the market share in search will be lost, the overall market growth will help drive revenue.
Furthermore, Google is expected to grow more than 18% per year with the additional investment in display technology and content on YouTube.
Excluding YouTube, search is the most significant cash generator and highest-margin business for Google.
As regards Google Network, it will only grow 8%. Moreover, if Google expects to drive operating margins to 40%, it will have to reduce investment in R&D and data centers.
Operating margins are expected to stay below 30% with the investment actions and higher personnel costs next year. Fortunately, the margins will start to expand again and reach 32% in 2015. The same is expected from cash flows. Although they will drop with investments, they are expected to exceed 25% year over year.
Management & Stewardship
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 NY. 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.
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.
Furthermore, the last thing Google has done is to launch its music store which consists of a music download store and a cloud-base digital locker to store music. Independent musicians can manage a page where they can sell their own music directly to consumers.
Google is also investing in the mobile arena. This has been its last heavy investment. 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. In 2010, Android´s share of smartphone shipments jumped to 23% surpassing market leaders, such as Apple and Research In Motion.
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 that will certainly use Google services. Indeed, last year, estimates of Google´s market share in mobile search have exceeded 90%.
Positives and Risks
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.
Google represents more than 60% of the 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.
Google will leverage its dominant position in Internet search and support a steady growth in display and mobile advertising, which will allow it to meet industry growth rates or even exceed them.
Although some competitors like Yahoo and AOL are claiming that they have surpassed Google, the evidence has shown that the company generated $2.5 billion in display advertising, exceeding the display revenue of the former.
Google is expected to aggressively participate in the market. Google is giving a try to DoubleClike 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.
Still there are a few risks that Google may face. The growing presence of social networks, Facebook, Twitter and LinkedIn will not be an immediate threat to Google´s search business but will affect Google performance in display ads.
ROC for the new businesses will be lower than that of its core search business. Google will have to continue investing as many other companies are investing heavily in content strategies.
Indeed, consumers may move to a competitor that is able to establish a stronger brand and a more useful experience. Google is investing in less competitive businesses, which may lead to a deterioration in its operating margin and ROC.
Last quarter results
To start with, Google´s balance sheet shows $35 billion in net cash with only $4.2billion 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. Actually, Google´s Mobile Division is growing at a 150% pace and now represents $2.5 billion in revenue on an annual basis.
In terms of shares, Google earned $9.72 per share, $1 a share more than what analysts have expected. Shares have risen nearly 20%.
Joe Bunner of Argus Research Company is clear: “Google´s results really make an investor long to invest in it.”
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.
Google websites generate revenue that is driven by its search engine and web properties like YouTube. Although a short-term loss of the market share in search will be lost, the overall market growth will help drive revenue.
Furthermore, Google is expected to grow more than 18% per year with the additional investment in display technology and content on YouTube.
Excluding YouTube, search is the most significant cash generator and highest-margin business for Google.
As regards Google Network, it will only grow 8%. Moreover, if Google expects to drive operating margins to 40%, it will have to reduce investment in R&D and data centers.
Operating margins are expected to stay below 30% with the investment actions and higher personnel costs next year. Fortunately, the margins will start to expand again and reach 32% in 2015. The same is expected from cash flows. Although they will drop with investments, they are expected to exceed 25% year over year.
Management & Stewardship
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 NY. 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.
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.
