As it matures, is Google still a buy?
The company is poised to benefit most from the expected jump in mobile advertising -- but its costs are also escalating.
Google (GOOG) as a brand is so strong that its name has become a verb. Further, Google’s core business — selling targeted advertising through its popular Internet search engine — is as robust as the brand. Indeed, more than 65% of online searches in the U.S. use Google.
And industry researcher eMarketer expects spending on mobile advertising to jump 65% to $1.2 billion this year and approach $4.4 billion by 2015.
Google, with an estimated 80% share of the mobile-search market, could beneﬁt most from that trend.
In the past seven years, Google has poured 10% to 13% of revenue into research and development, moving aggressively into new markets.
Google competes with Facebook via its new social network Google+, which has attracted more than 40 million users.
Efforts to digitize books have rankled the publishing industry, while Google’s online applications challenge the dominance of Microsoft’s Ofﬁce suite of business software.
Google’s most successful interloper is Android, an operating system for mobile devices that Google makes available free. Android powered 44% of smartphones sold in the U.S. in the
three months ended August.
Google’s pending $12.5 billion purchase of Motorola Mobility Holdings — its biggest to date — would have the software giant making mobile devices and television set-top boxes.
Its other major deals — Android in 2005, YouTube in 2006, and DoubleClick in 2007 — primarily involved digital properties.
Importantly, the Motorola deal would give Google a war chest of wireless patents at a time when many ﬁrms are scrambling to defend against legal assaults.
Google earned $9.72 per share excluding stock-based compensation and other non-operating expenses, up 27% and $0.98 above the consensus.
Revenue jumped 33% to $9.72 billion, which includes $2.21 billion in trafﬁc-acquisition costs, the portion of revenue Google shares with its partners. Net revenue rose 37%.
Operating cash ﬂow surged 37% to $3.95 billion, marking the ninth consecutive quarterly advance.
Investors should note that Google’s costs are also escalating, with operating expenses and stock-based compensation both jumping 50%. However, the earnings surprise suggests costs did not rise as much as many anticipated.
Shares have rallied since the earnings announcement but still appear reasonably priced. The stock trades at 17 times trailing earnings, 21% below the median for Internet software and services stocks in the S&P 1500 Index.
Excluding net cash of $39.57 billion, or $121 per share, the stock’s trailing P/E ratio is 13. Google is a Long-Term Buy.
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The stock is expensive and the guidance is weak -- not an appetizing combination.
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