Year over year, net cash provided by operating activities decreased 1.65%. In the quarter, Google Inc (NASDAQ:GOOG) poured $2.44 billion into investing activities, a distinct difference from last year’s first quarter in which the company had derived cash flow from investing activities.
Google Inc (NASDAQ:GOOG)’s complex and diversified business is focused on the ways people connect with information, with major focuses of the company including its Android platform, Google +, an iconic search engine, YouTube, Gmail, and a plethora of other services. As Google approaches fresh all-time highs, is the company primed for investment or should investors wait for a considerable pullback?
Strengths:
Explosive revenue growth:
In 2003, Google Inc (NASDAQ:GOOG) reported revenue of $1.46 billion; in 2012, the company announced revenue of $50.17 billion, representing year over year annual growth of 48.14%, a strong trend which it is highly anticipated to sustain into the future with projections placing 2017 revenue at $102.37 billion (this growth has been a result of the rapid adoption of the company’s platform and acquisitions).
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Institutional vote of confidence:68.72% of shares outstanding are held by institutional investors, displaying the confidence that some of largest investors in the world have placed in the company and its future.
Historic margin expansion:The company’s profit margin has expanded from roughly 5% in 2004 to the current level of 21.84%, an extremely advantageous trend.Dominant position in the industry:Google Inc (NASDAQ:GOOG) currently possesses 67% market share of the U.S. search industry, representing a dominant position which has only grown stronger over the past few years.
Net cash position:Despite possessing $8.8 billion in debt on its balance sheet, the company’s $50 billion in cash and cash equivalents results in a net cash position of $41 billion, or roughly $124 per share, a major strength.
Solid cash flow:In 2012, Google generated $13.75 billion in cash flow, representing the financial strength the company possesses.
Weaknesses:
High valuation:
Currently, Google Inc (NASDAQ:GOOG) carries a price to earnings ratio of 24.85, a price to book ratio of 3.65, and a price to sales ratio of 5.21; all of which indicate a company trading with a high valuation on a relative basis to the overall market.
Lack of dividend:
Google has in no time in the company’s past paid out a dividend, and has not expressed any plans to do so in the future.
Cost of revenue outgrowing revenue:
From 2010 to 2012, the company’s revenue has grown 60.51%, while the company’s cost of revenue has grown 64.88%; a troubling trend which is a major weakness of the company
Opportunities:
Acquisitions:
In May 2012, Google acquired Motorola Mobility Holdings; the company has a long history of aggressive acquisitions, and further acquisitions could introduce new and innovative technologies to the company which could fuel growth.
Mobile search segment:
The mobile search industry is among the fastest growing in the world, with both revenue per search and total Internet searches per mobile device expanding aggressively, and further growth in this industry could present incredible opportunity for the company to take advantage of.
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YouTube segment:YouTube has, for years, been among the company’s fastest growing segments, with both revenue per page view and number of users growing at an incredible pace, and further growth in the YouTube segment could present an opportunity for the company to optimize this revenue stream.
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Explosive growth from gmail:Gmail, while only equating for 1.10% of overall business, has been among the company’s fastest growing segments, and a continuation of this trend seems inevitable and should fuel overall company growth slightly.
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Gaining market share:
From December 2012 to January 2013, Google acquired 0.3% of the United States search industry, and over the past years, it has seen an incredible rise to the top position and further gains in market share could improve the company’s pricing power in terms of advertisements.
Threats:
Shrinking PC market:
PC search advertisements account for 33.23% of overall business, however, the number of global PCs in use is expected to decline, beginning from 2015, which could pose a serious threat to Google’s core business.
Competitors:
Major publicly traded competitors of Google Inc (NASDAQ:GOOG) include Baidu.com, Inc. (NASDAQ:BIDU), Yahoo! Inc. (NASDAQ:YHOO), Microsoft Corporation (NASDAQ:MSFT), and AOL, Inc. (NYSE:AOL). All of these companies operate in the same industries as Google and compete directly with it.
Baidu is valued at $32.23 billion, does not pay out a dividend, and carries a price to earnings ratio of 19.25. Baidu offers fast paced growth in all segments of its businesses, and is focused on the Chinese search engine market. Their stock is trading at a discount based on the P/E ratio, and its business model possesses a strong profit margin of 44.12%.
Yahoo! is valued at $25.18 billion, does not pay out a dividend, and carries a price to earnings ratio of 6.46. Yahoo is a diversified digital media company with its offering available in 45 languages and 60 countries. Institutional confidence is portrayed in the company’s institutional ownership of 75%. The profit margin for the company increased from 20.23% in the fourth quarter of 2012 to 34.22% in the first quarter of 2013.
Microsoft is valued at $234.91 billion, pays out a dividend yielding 3.28%, and carries a price to earnings ratio of 15.38. Microsoft remains a dominant force in the PC industry. However, it possesses a diversified business with operations in its Windows segment, Xbox segment, and recently, it entered the smartphone industry with Nokia Corporation (ADR) (NYSE:NOK).
For the past decade, the stock has only risen 16.73%, excluding dividend, being held in a distinct channel. The profit margin for the company in the first quarter of 2013 was 29.55%.
AOL is valued at $3.01 billion, does not pay out a dividend, and carries a price to earnings ratio of 3.56. AOL’s business segment offers many of the same services as Google Inc (NASDAQ:GOOG), and is also focused on the way people connect with information. With an institutional ownership near 100%, there is no lack of confidence from big-money investors. In the fourth quarter of 2012, AOL reported a profit margin of 29.26%, a decline from the 40% range in 2010-2011.
The Foolish bottom line
Financially, Google is as strong as they come. The company possesses accelerated revenue growth, historic margin expansion, and a net cash position. The only true weaknesses in the company are its lack of dividend and high valuation. However, this premium valuation is compensated through explosive growth.
Looking forward, the company is strategically placed to take advantage of the shift to mobile devices, and should experience growth at an accelerated rate. All in all, Google Inc (NASDAQ:GOOG) is the undeniable king of search, and will hand investors returns unmatched by the overall market for decades to come.
The article A Dominant Force in the World of Tomorrow originally appeared on Fool.com.
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