Google Inc (NASDAQ:GOOG) generates about 92% of its revenue from advertising with the remaining 8% from Motorola Mobile (hardware and other). Advertising revenue is derived via the AdWords program for businesses to promote their products/services. The company’s AdSense program allows third parties to post relevant ads for efficient target marketing.
Geographically, 46% of Google Inc (NASDAQ:GOOG)’s revenue is generated in the United States, 11% from the United Kingdom, and the remaining 43% from the rest of the world. This is based on the 2012 figures of the billing addresses of Google’s customers.
Google is currently fairly valued with a trailing PE ratio of 24.5, a forward PE of 14.73, a PEG of 1.19, and a price to book ratio of 3.52. There haven’t been too many surprises to cause the stock to move too drastically towards an under or over valuation.
The company was able to achieve the following margins for the past twelve months:
| Gross Margin | 59% |
|---|---|
| Profit Margin | 21% |
| Operating Margin | 27% |
Google Inc (NASDAQ:GOOG) is awash in cash with a total of $48 billion with only $7.2 billion in debt. Operating cash flow for the past twelve months was $16.6 billion, while the free cash flow was $10.77 billion. The current ratio of 4.22 and debt to equity ratio of 10 shows the strength of Google’s balance sheet.
Google’s movement into offering fiber services is an interesting development. Last year, the company began offering Google Fiber to Kansas City with internet speeds that are 100 times faster than today’s average broadband performance (known as gigabit internet). Google has plans to offer Google Fiber to Austin, Texas by mid-2014. It should be interesting to see what other regions will adopt the Google Fiber service in the future.
The primary risk to Google is the competition that is creeping into the online advertising sphere. Facebook Inc (NASDAQ:FB) is making its mark by engaging its billion worldwide social network users with targeted ads. Facebook’s new effort, Facebook Inc (NASDAQ:FB) Home, is a strategic move for mobile FB users to see their activity before they unlock their devices. This is designed to increase activity on the website and may cut into Google’s advertising market share. Although the risk exists, I don’t think that Facebook Inc (NASDAQ:FB) will be detrimental to Google Inc (NASDAQ:GOOG)’s continued growth.
Yahoo! Inc. (NASDAQ:YHOO) is another online advertising competitor for Google. However, Yahoo is a much smaller player than Google with one-year revenue of $4.9 billion as compared to Google’s $50 billion. Although Yahoo! Inc. (NASDAQ:YHOO) had made a small dent in market share, it is doubtful that the company will pose much of a threat to Google’s stronghold.
Another competitor, AOL, Inc. (NYSE:AOL) achieved one-year revenue of $2.19 billion. AOL, Inc. (NYSE:AOL) offers a variety of online content and advertising which includes the well-known mapping service, MapQuest. This is another company that owns a small piece of the online advertising pie, but it shouldn’t be much of a threat for Google Inc (NASDAQ:GOOG).
Google achieved an annual earnings growth of 20.6% for the past five years. Looking forward, the company is expected to grow earnings annually at 14.6% for the next five years. This is significantly higher than the expected annual earnings growth of the S&P 500 of about 9% over the next five years. If Google is able to meet or exceed its earnings expectations for the majority of its quarters, the stock should continue to significantly outperform the market. Given Google Inc (NASDAQ:GOOG)’s expected growth, I think that the current stock price of $790 will grow to be worth $1500 in about five years.
The article Google: Likely to Continue Outperforming the Market originally appeared on Fool.com and is written by David Zanoni.
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