Search giant Google Inc (NASDAQ:GOOG) has been scoring a number of upgrades on the Street, and rightly so. The company is extremely well-positioned to capitalize on numerous secular trends primarily related to being the most dominant force in the Internet and Mobile OS. The company’s share price saw a pull-back recently from the all-time high of ~$920, and this might be a good time to commit more capital to Google Inc (NASDAQ:GOOG)’s stock.
Strong numbers across the board; Motorola still a laggard
The most important number for Google Inc (NASDAQ:GOOG), total paid clicks, has shown no signs of slowing down and was up 20% Y/Y in the most recent quarter. The average cost-per-click (CPC) saw a 4% Y/Y decline during the period. Google Inc (NASDAQ:GOOG)’s top-line grew at a healthy pace of 31% Y/Y to $13.97 billion. The company’s operating income for 1Q13 was $3.48 billion, which points to an operating margin of 25% for the consolidated business, which marks a contraction from 1Q12 when it stood at 32%.
The contraction was largely due to the weight of an operating loss of $271 million arising from the Motorola Mobile division. Google Inc (NASDAQ:GOOG)’s net income for Q1 FY13 was $3.35 billion, which includes earnings from the soon-to-be separated Motorola Home business. Google Inc (NASDAQ:GOOG)’s operating cash flow stood at $3.63 billion, and the company’s free cash flow stood at $2.43 billion after paying for capital expenditures worth ~$1.2 billion. The company continues to invest in businesses that have been widely adopted by consumers, especially Android, YouTube, and to a smaller extent, Chrome.
Core businesses are rock solid
Google’s core business of Search and Display advertising continues to perform very well as more Internet-connected devices hit the market. Revenue from Google sites saw an 18% Y/Y increase to $8.64 billion, and the company’s network revenue saw a growth of 12% Y/Y and stood at $3.26 billion. The company’s revenue from the Motorola Mobile division stood at $1.02 billion.
The company’s search market share remains rather steady. Google held search market share of ~66.5% in U.S., followed by Microsoft Corporation (NASDAQ:MSFT) with 17.3% and the struggling Yahoo! Inc. (NASDAQ:YHOO) with only 12%, according to data from comScore. Google continues to gain revenue at the expense of comparatively weaker firms like Yahoo! Inc. (NASDAQ:YHOO). In Q1 2013, Yahoo! Inc. (NASDAQ:YHOO) reported a 7% Y/Y decline in revenue growth, and it hasn’t seen revenue growth for a while now.
As a result, Yahoo! Inc. (NASDAQ:YHOO) went shopping and bought growing social platform Tumblr for $1.1 billion. Tumblr has more than 300 million visitors each month, and a strong presence in mobile as well, both of which are very attractive traits for an Internet business. Tumblr might have been a good buy for even Google as well, as the search giant’s cash hoard ballooned to over $50 billion.
Newer areas
Google’s Shopping business has finally started to see some traction in monetization. The Shopping functionality of Google has managed to list more than 1 billion products already. The company’s product listing ads have been rolled out on a much wider scale with introductions in the European region, and also on mobile devices, both of which should lead to incremental revenue for Google even after factoring some cannibalization occurring in search. The transition from a free-model to a paid model should work well for Google’s top line.
Google’s Enterprise business has gotten a large number of global firms to use its enterprise cloud product. Up to 58% of the Fortune 500 are now using this cloud product from Google, growth is coming from across all regions and industries. Many governments and big customers across the globe continue to use Google’s Enterprise solutions.
In addition, Google Fiber is a big and long-term bet of the company, and one that can potentially transform the company’s future and reshape the entire Internet. These newer non-core ventures of the company have strong growth potential for improving the revenue of Google even more in the long run.
Very popular in non-core
The firm’s leadership position in mobile with Android has enabled it to ramp up sales from its Play Store while also aiding substantially in enabling the launch of a number of hardware products with its manufacturing partners.
The number of Android-based devices has surpassed 900 million activations and the number of Google Play app downloads stands at more than 48 billion. Owing to increased hardware sales and content sales from the Play Store, the company’s Other Revenues line item saw a 150% Y/Y increase and crossed $1 billion for the first time.
These products and launches have enabled the company to have the most widely used apps on mobile. Facebook Inc (NASDAQ:FB) is the most widely used app on mobile, in the U.S., and after that, the next five leading apps are all powered by Google including Maps, Play, Search, Gmail, and YouTube. However, Google is still the number one in terms of mobile platform in the U.S. with 52% market share at the end of April, according to comScore.
Enhanced campaigns a major positive?
The rapid consumer adoption and usage of multiple devices has led to firms using different ad campaigns on mobile, desktop, and tablets. To address this change, Google unveiled “Enhanced Campaigns,” which is a big improvement from AdWords, in 1Q13. The introduction of Enhanced Campaigns will enable advertisers to run one unified ad campaign across all devices and with more improved measurement analytics.
As ~95% of Google’s advertising clients run campaigns in multiple screens to take advantage of the consumer behavior, the Enhanced campaigns product will enable Google to provide more clarity to advertisers. All the ad campaigns Google currently runs will be upgraded to Enhanced Campaigns by the end of 2Q13.
And this will enable not only appeal to big-pocketed brand advertisers, but also relatively smaller advertisers to place advertisements on mobile, desktop, and tablets as well. Clearly, Google is innovating quickly behind the curtains.
Going forward
Google’s business has always been about online advertising to offline attribution, and making sure those results are measured accurately. The company continues to have a steady market share in search engine while constantly introducing newer products like Product Listing Ads (PLAs) and Enhanced Campaigns to earn incremental revenue. The company seems to be attractively valued at current levels with a forward P/E of ~16, which seems like a good entry point to take advantage of Google’s enormous future upside.
The article Is This Internet Giant a Buy on the Pullback? originally appeared on Fool.com.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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