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.