Android Expands Google's Ad Empire

9/24/2012


  Recent Price
$718
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
18
  Shares (millions)
331
  Long-Term Debt as % of Capital
4%
  52-Week Price Range
$718.66 - $480.60

Forgive investors for being distracted by Google's ($718; GOOG) cable-television ambitions, web glasses, web TVs, and self-driving cars. Like Apple ($702; AAPL), Google aspires to invent gadgets consumers never knew they wanted. But its core business remains advertising, which accounted for 96% of sales last year. Most of Google's biggest strategic decisions support one objective: finding new ways to bring ads to consumers.

Google is one of just two S&P 500 Index companies that has grown cash provided by operations more than 15% in each of the last nine fiscal years, a streak that should stretch into 2012. In the first half of the year, Google's operating cash flow climbed 19%, and the consensus projects 16% higher earnings per share in the last six months of 2012. At 18 times trailing earnings, the stock trades 32% below its five-year average and 8% below the median for S&P 1500 internet stocks. Google is a Focus List Buy and a Long-Term Buy.

Business breakdown

Google first began delivering ads through its namesake search engine in 1998. Today, it powers 86% of global searches and 93% of mobile searches, according to industry researcher NetMarketshare. Google said the number of mobile searches has quadrupled over the last year. By one estimate, mobile devices could account for 25% to 30% of all U.S. web searches in 2012.

The future of Google's search business seems to lie in Android, the company's mobile operating system. More than 500 million Android devices have been activated — versus about 327 million iPhones and iPads — and that total climbs by more than 1.3 million new accounts each day.

Apple's patent victory over Samsung has caused some device makers to quietly explore other operating systems, potentially reducing Google's access to the mobile market. But Google has one manufacturer, Motorola Mobility, in its hip pocket following a $12.5 billion acquisition in May.

Google must first turn around Motorola's mobile-device unit, unprofitable in 14 of the past 16 quarters. Motorola's slice of the U.S. mobile-phone market has shrunk to 11% from 20% two years earlier, according to comScore. The first crop of Motorola smartphones released on Google's watch will arrive ahead of the holidays, and management intends to consolidate Motorola's vast phone lineup, which featured 27 models last year. Google also plans to lay off 20% of Motorola's work force.

Continuing its expansion into mobile services, in August Google paid $25 million for Frommer's, a publisher of travel guides. Nearly 40% of smartphone users accessed travel content in July, says comScore.

Conclusion

Net cash on the balance sheet has swelled to $43.12 billion, or nearly $112 per share, up tenfold over the last seven years. Credit that cash hoard to growth in free cash flow, up at least 9% in 24 of the past 28 quarters. In July, Google said it has no immediate plans to launch a dividend. But given trends among tech companies, it seems likely that Google will eventually pay a dividend. An annual report for Google Inc. is available at 1600 Amphitheatre Parkway, Mountain View, CA 94043; (650) 253-0000; investor.google.com.

GOOGLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '12
10.12
vs.
8.74
+ 35%
653.14
-
556.52
17 - 15
Mar '12
10.08
vs.
8.08
+ 24%
670.25
-
564.55
19 - 16
Dec '11
9.50
vs.
8.75
+ 25%
646.76
-
480.60
18 - 14
Sep '11
9.72
vs.
7.64
+ 33%
627.50
-
490.86
19 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
37.91
36.04
0.00
646.76
-
473.02
18 - 13
2010
29.32
29.60
0.00
630.85
-
433.63
21 - 15
2009
23.65
23.19
0.00
625.99
-
282.75
27 - 12
2008
21.80
19.49
0.00
697.37
-
247.30
36 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
72
49
98
93
45
81

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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