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Google – Is It In Your Portfolio Yet?

google-is-it-in-your-portfolio-yet
By: Larry Darrell
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When Larry Page and Sergey Brin met sometime in 1995 at Stanford University, they probably had no idea that together they would lay the foundations of what would eventually become the world’s largest go-to resource for answers to almost every question imaginable.

Page and Brin registered Google as a domain on September 15, 1997. The name – a play on the word "googol," a mathematical term for the number represented by the numeral 1 followed by 100 zeros – symbolized Page and Brin’s ambition to organize a seemingly infinite amount of information on the web.

Today, that noun has become a verb.

Google Inc. (GOOG) is best known for its search engine, but it is also a major player in online advertising, operating systems and platforms, enterprise and hardware products. The company has traditionally generated a major chunk of its revenues from online advertising services, but hardware products have recently started contributing to revenues.

Search

The Google search engine allows users to look up for information on almost anything on the planet. The service retrieves search results from the billions of pages Google indexes, and displays the results according to their relevance to the user. The company integrates various features into its search engine that help it offer tailored search services.

According to NetMarketShare, Google controls 70.9% of the global desktop search engine market, followed by the Chinese search engine, Baidu, Inc. (BIDU) which controls 16.5%.

Advertising

Advertising is how Google generates its revenues. Its main products in this segment include AdWords, AdSense, Google Display and Google Mobile, among many others.

Google AdWords is an online auction-based advertising program that allows advertisers to place both text and image-based ads on Google or its member websites. This includes the ads users see at the top of their search results when they ‘Google’ something.

Advertisers usually pay Google for ads on a cost-per-click basis (CPC), but the company also offers AdWords services on a cost-per-impression (CPM) basis, for which it charges a fee for every 1,000 impressions.

Google AdSense allows advertisers to put up ads on participant websites which are relevant to the content on that website.

Google Display allows advertisers to put text, videos, images, or interactive ads across computers or mobile devices.

Advertisers can also advertise on Google network websites, which include YouTube and Google Finance.

Operating Systems and Platforms

Google offers the Android, Google Chrome, Google TV and Google Books operating systems.

Android is an open-source mobile platform that runs on a majority of the smartphones sold today. According to a third quarter (3Q) fiscal year 2013 (FY13) report from the International Data Center, 81% of all smartphones run on the Android OS, and Samsung Electric’s (SSNLF) devices accounting for 39.9% of all Android shipments.

The Google Chrome OS is an open source operating system based on Google’s Chrome browser.  It is a cloud-based operating system designed especially for people who access everything on the web.

Google TV allows users to combine their television and internet experiences through the Android OS and the Chrome browser.

Enterprise

Google's Enterprise unit offers a variety of products to users, including Gmail, Google Docs, Google Sites, and Google Calendar. It also manages the Google Checkout, Google Commerce Search, Google Maps API and Google Earth Enterprise services.

Revenue Segmentation

The company traditionally earned almost all its revenues from advertising services up until it acquired Motorola Mobility, which now accounts for 8% of its total revenues. Google brands a lineup of smartphones with its name, and it has expressed its intention to increase its presence in the smartphone industry by providing consumers with better phones at the lowest prices.

Other sources of revenues include licensing fees from Google Apps and Google Search Appliance products.

Key Metrics

According to comScore, out of the 19.3 billion core explicit searches originating from the US in October, Google netted 12.9 billion, or 66.9% of the total.

As consumers became increasingly reliant on their smartphones and tablets, Google’s advertising revenues took a hit over 2QFY12-1QFY13, as its ads were previously designed to be viewed on desktops and laptops. The company has since increased its efforts to optimize its service to make ads available across various devices.

Google has also introduced the ‘Enhanced Campaign’ update for its AdWords, which lets advertisers reach consumers across devices based on specifications like location, time, and device type. According to a study by Adobe, the update has led to a 6% increase in cost-per-click (CPC) over the three months from March to May 2013.

Growth

Google’s revenues have grown at a compounded rate of 24.8% over the last five years, and analysts expect revenues to grow 10% annually over FY14-17.

Search

Google historically depended on its several advertising platforms for more than 90% of its revenues, but that share has declined slightly since the acquisition of Motorola in 2012.

Cloud

The cloud computing and public IT cloud services industry is projected to grow at a compounded rate of 23.5% over FY13-17, which will make it a $107 billion industry by 2017.

Within cloud services, Infrastructure-as-a-Service (IaaS) will become a $30 billion industry by 2017, from $10 billion in 2012, according to analysts.

Google Compute Engine, the company’s cloud platform, is available to all users. The Compute Engine offers cloud storage, computing, and application services. Furthermore, in order to compete with major players like Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT), and The International Business Machines Corporation (IBM), the company has slashed its storage prices. Google is now charging only 4 cents a month for one gigabyte of storage on its servers, compared to the previous 10 cents per month.

Mobile

Mobile devices are becoming primary search devices and the new driving force for advertisement revenues. Global mobile ad spending accounted for around $8 billion of Google’s revenues in 2013.

According to eMarketer, Google will have a 48.2% share in total US mobile ad revenues by the end of 2013. The share is expected to reach 50.6% by 2015. In contrast, Facebook, Inc. (FB), which generates the second-most revenues from mobile advertising, will have an estimated market share of 15.3% by the end of 2013, which is expected to fall to 13.1% by 2015.

According to eMarketer, US mobile search revenues will account for 30.8% of Google’s total US ad revenues by 2015, while US desktop search revenues’ share will shrink to 43.2%. (The remaining US ad revenues will be contributed by ad display revenues.)

Wearable Technology

As the smartphone and tablet markets reach maturity, wearable technology is expected to be the next big thing in the tech industry. According to research conducted by the Credit Suisse Group AG, wearable tech will be a $30-50 billion market in the next three to five years, assuming that 15% of all wearable devices will be attached to existing smartphones.

Currently, Google Glass is the only wearable technology product offered by Google. The gadget has an optical head-mounted display, which has the capability to take pictures, capture videos, be a GPS, text and search, among many other things.

Others

Google’s portfolio is extremely diversified. Google’s Chromecast – a streaming TV device with access to Netflix, Inc.’s (NFLX) services, Youtube, Hulu Plus, and Google Play store – costs $35 and is expected to continue to gain traction with an increasing number of users who favor streaming media instead of traditional TV and cable.

Google’s ChromeBooks, which start at $199, are now available in more than 8,000 locations around the world and have sold at a phenomenal rate.

Performance

Google reported revenues and non-GAAP earnings of $14.98 billion and $10.74 per share for 3QFY13, beating consensus estimates of $14.8 billion and $10.34. Revenues and per share earnings were up 22% and 21% over the year-earlier quarter.

With the shift to mobile usage, Google’s costs-per-click declined 8% year-over-year (YoY) in the period, but the total volume of paid clicks increased 26% YoY, which offset the decline.

More than 40% of YouTube users accessed the video streaming service from mobile devices in the quarter, compared to only 6% two years ago.

Stock Price Performance

Google’s stock is up 280% in the five years to date, powered by its strengthening position in the online ad market.

Over the last twelve months, Google has outperformed both the Technology SPDR ETF (XLK) and the NASDAQ 100. The company started significantly outperforming the two benchmarks after its 3QFY13 earnings release, which beat analysts’ expectations for the first time this year.

Valuation

Google has traded at an average price to earnings (P/E) multiple of 22.8x in the last five years. Currently, its forward P/E is 20.3x, which is an 11% discount to its historical average. Google is also trading at a 38% discount to its competitors’ average P/E of 33x.

The Bottom Line

Google, which initially started as a research project, is now the most diversified internet company. Given its market leadership and its various initiatives to capitalize on and apprehend emerging trends, we believe that the company is strategically positioned to grow in several directions with its diversified portfolio. It is still valued fairly cheaply, compared to the new companies on the block, and we recommend the company as a buy.  

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