Google Spins Web Into Gold

10/24/2011


  Recent Price
$591
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
17
  Shares (millions)
327
  Long-Term Debt as % of Capital
5%
  52-Week Price Range
$642.96 - $473.02

Google's ($591; GOOG) brand is so strong that that its name has become a verb. And as September-quarter results indicate, Google's core business — selling targeted advertising through its popular Internet search engine — is as robust as the brand.

Google earned $9.72 per share excluding stock-based compensation and other nonoperating 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 nearly 6% 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 Buy and a Long-Term Buy.

Business breakdown

Advertising accounts for 96% of Google's revenue. More than 65% of online searches in the U.S. use Google.

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. It's not yet clear if the mobile search market will prove as lucrative as traditional Web search, though early indications suggest smartphone users click on advertisements less often.

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 ($27; MSFT) Office suite of business software. Google has even made multiple investments in wind-energy projects.

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 ($39; MMI) — 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. 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
Sep '11
9.72
vs.
7.64
+ 33%
627.50
-
490.86
19 - 15
Jun '11
8.74
vs.
6.45
+ 32%
595.19
-
473.02
19 - 15
Mar '11
8.08
vs.
6.76
+ 27%
642.96
-
551.28
22 - 19
Dec '10
8.75
vs.
6.79
+ 26%
630.85
-
518.85
23 - 19
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
29.32
26.31
0.00
630.85
-
433.63
24 - 16
2009
23.65
20.41
0.00
625.99
-
282.75
31 - 14
2008
21.80
16.69
0.00
697.37
-
247.30
42 - 15
2007
16.59
13.29
0.00
747.24
-
437.00
56 - 33
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
91
48
98
95
55
67

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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