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Google Inc (GOOG), Yahoo! Inc. (YHOO): Is This Internet Giant a Buy on the Pullback?

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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.

Google Inc (GOOG)

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.

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