In­ter­net gi­ant

Finweek English Edition - - INVESTMENT -

The dic­tio­nary de­fines Google not only as a brand name for a global tech­nol­ogy com­pany, but also a fre­quently used verb re­lat­ing to the search of al­most any­thing imag­in­able. The in­no­va­tion and ac­cess to in­for­ma­tion has cre­ated a tech gi­ant that has be­come a house­hold name, en­gag­ing users both far and wide on a daily ba­sis.

Re­cently, sec­ond- quar­ter re­sults showed earn­ings per share ($6.08) fall short of con­sen­sus es­ti­mates ($6.25) while rev­enues for the pe­riod ($15.96bn) ex­ceeded ex­pec­ta­tion ($15.6bn), com­ing in 22% higher than the pre­vi­ous year’s com­par­a­tive. The reporting quar­ter shows con­sis­tency in the group’s ad­ver­tis­ing rev­enue in that it continues to be driven pre­dom­i­nantly by Google sites (69%) and part­ner sites (21%) while there is a slow but con­sis­tent pat­tern in which the pro­por­tion of rev­enues is grow­ing steadily out­side of the US.

The chal­lenge for sig­nif­i­cant earn­ings growth re­mains with mo­bile. The in­creased avail­abil­ity of In­ter­net in the palm of one’s hand, wit­nesses the con­tin­ued mi­gra­tion of ac­cess, mov­ing from com­puter to smart­phone. Google Inc. has two im­por­tant met­rics re­lat­ing to the ads served via its host and part­ner sites, Paid Clicks and Cost-Per-Click. The Paid Click ag­gre­gates the num­ber of clicks from the ads placed and has in­creased around 25% from last year. In­creased In­ter­net avail­abil­ity in­creases the num­ber of clicks ex­pe­ri­enced from ad­ver­tis­ing. How­ever, in­creased smart­phone us­age equates to a smaller screen size, which in turn equates to a re­duced amount of ad­ver­tis­ing space pro­vided by that of a lap­top or desk­top com­puter. Google’s rev­enue gen­er­ated from ad­ver­tis­ing clicks, the Cost-Per-Click, has in turn de­clined around 7% this year.

How­ever, a chal­lenge re­mains: the op­por­tu­nity for fu­ture growth. Google has mo­nop­o­lised the search en­gine space with more than two thirds of global mar­ket share. Google’s mo­bile op­er­at­ing sys­tem An­droid holds as the most widely used, with Google (ob­vi­ously) the de­fault search en­gine on these mo­bile de­vices. This dom­i­nance is un­likely to change in the near term and pro­vides a phenom­e­nal plat­form of which to lever­age. The small­est pro­gres­sion in mo­bile mon­eti­sa­tion can have an ex­po­nen­tially pos­i­tive ef­fect on the com­pany’s earn­ings and Google is fo­cused on this tran­si­tion of its busi­ness.

In t he sec­ond quar­ter of 2014, Google made 13 ac­qui­si­tions, keep­ing to the com­pany’s trend of buy­ing more than one com­pany a week since 2010. The ac­qui­si­tions aim to serve the pur­pose of both fur­ther­ing core op­er­a­tions and adding di­ver­sity to the busi­ness. The pur­chase of mDia­log and Adom­e­try, for ex­am­ple, should as­sist the core on­line ad­ver­tis­ing as­pects of the busi­ness while the pur­chase of Songza wit­nesses the emer­gence of a new fo­cus to­wards mu­sic stream­ing. Sky­box Imag­ing wit­nesses in­te­gra­tion to Google Maps & Project Loon while Ap­pu­rify in­te­grates into Google Cloud. Google has the lux­ury of more than $61bn in cash (as re­ported in the sec­ond quar­ter of 2014) which al­lows new ac­qui­si­tions to be ab­sorbed eas­ily. This plethora of ac­qui­si­tions, al­though ques­tioned by some in­vestors, al­lows the com­pany to hedge them­selves against an ever-chang­ing dig­i­tal age, by po­si­tion­ing them­selves in new mar­kets ahead of po­ten­tial com­peti­tors.

In­no­va­tions such as driver-less cars, wear­able com­put­ers and Google Glass are fur­ther prod­ucts that dab­ble into the un­known realm of fu­ture tech­nolo­gies, prod­uct lines and additional rev­enue streams. With Google shares trad­ing on a cur­rent P/E ra­tio of 25 times and a for­ward es­ti­mate of 22.5 times, it ap­pears hardly de­mand­ing rel­a­tive to peers in the tech­nol­ogy and so­cial me­dia space. The risks of pos­i­tive earn­ings sur­prises mov­ing for­ward are more likely than that of neg­a­tive sur­prises, mak­ing Google a favourable tech­nol­ogy/so­cial me­dia can­di­date for any long-term port­fo­lio.

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