GOOGLE GOOG OUTLOOK 2009 2010
Although GOOGLE (GOOG) is facing some near-term headwinds due to global economic weakness, its long-term growth story remains intact
Shares of Internet search company Google (GOOG 332.00) have been falling. However, it has rebound due to the recent strong earnings announcement.
Advertising Firm
Although Google provides technology services to individuals, the vast majority (97%) of its revenue generation is through advertising. Companies pay to place text-based advertisements next to Google Web search results. Because prices are based on a bidding system based on keywords, both big and small firms are able to utilize Google to buy ads that are relevant to their respective business. Ads are typically sold on a paid-per-click basis, meaning if a user does not click on the ad, the advertiser does not pay a fee.
Google also partners with other Web sites that display Google ads and/or have a Google search bar. Google then shares a portion of the advertising revenue with partners. There is no fee to participate in the program, encouraging both small and big Web sites to partner with Google.
With the 2008 acquisition of DoubleClick, Google has the ability to allow sites to place more interactive ads, presenting a good opportunity for Google to increase sales to companies that want more than just text-based ads.
Strong Outlook
Google's easy-to-use and uncluttered interface has allowed the company to continue to capture search market share from competitors. As Google expands its brand presence through its innovative product offerings, we expect its market share to continue to grow.
| Global Market Share | | Yahoo | MSN/MSN Live | AOL | Other |
| 2008 (Sept.) | 79.9 | 11.0 | 4.8 | 2.1 | 2.7 |
| 2007 | 77.0 | 12.5 | 5.4 | 2.1 | 2.5 |
| 2006 | 75.0 | 12.5 | 6.9 | 2.4 | 1.7 |
| 2005 | 66.4 | 15.1 | 10.9 | 3.6 | 4.0 |
| 2004 | 56.9 | 19.7 | 13.4 | 4.2 | 5.9 |
* data from market share net apps
If approved by regulators, Google is poised to make a competitor into a partner through a recent agreement with Yahoo! (YHOO), the second most popular search engine. Under the terms of the deal, which was made in June after Yahoo rejected a buyout offer from Microsoft (MSFT), Yahoo will run Google ads in North America in return for a share in revenue.
The government has expressed antitrust concerns because Yahoo and Google command 90% of the search market, so companies have voluntarily delayed the implementation of the agreement. While it is unclear if the partnership will be blocked, the fact that the pricing is auction based increases the chances it will be approved. Google is currently partnered with AOL and Ask.com.
On top of market share gains, Google will benefit from the continuation of strong growth in Internet advertising spending as more consumers and businesses embrace the Internet:
| Global Advertising Spending* | 2010 | 2009 | 2008 | 2007 | 2006 |
| Total Ad Spending | $544.4 bln | $514.5 bln | $487.7 bln | $458.3 bln | $431.6 bln |
| % Ad Spending Year-Over-Year-Growth | 5.8% | 5.5% | 6.4% | 6.2% | - |
| Internet Spending | $66.9 bln | $57.1 bln | $47.5 bln | $37.8 bln | $28.8 bln |
| Year-Over-Year Internet Spending Growth | 17.2% | 20.1% | 25.8% | 31.1% | - |
| Internet Share of Total Ad Spending | 12.3% | 11.1% | 9.7% | 8.3% | 6.7% |
| Google Revenue** | $24.6 bln | $20.2 bln | $16.1 bln | $11.1 bln | $7.3 bln |
| Google Revenue Growth | 21.8% | 25.5% | 45.1% | 52.1% | - |
| Google Share of Internet Spending | 36.8% | 35.4% | 33.9% | 29.4% | 25.4 |
| Google Share of Total Ad Spending | 4.5% | 3.9% | 3.3% | 2.4% | 1.7% |
*Advertising spending estimates from ZenithOptimedia. Google estimates from Thomson Reuters
**Google revenue is less traffic acquisition costs (the share of revenue paid to content partners)
Other Potential Revenue Growth Opportunities
Products such as Google Mail, Google Checkout, web browser, entrance into traditional media outlets and the acquisition of YouTube.com have yet to be profitable, which is a common criticism Google faces. However, they do increase Google's brand presence and search traffic, which in turn generates ad revenue.
In addition, the products are a potential future revenue source as Google works toward monetization -- such as its recent initiative to add click-to-buy links to Amazon and iTunes on YouTube music videos. We expect Google's culture of innovation will encourage further product improvements and developments.
Similar to positioning itself to benefit from the boom in Internet advertising growth, Google is positioning itself to capitalize on the fast growing mobile advertising market through its recently created mobile phone operating system and partnerships with major wireless providers.
Mobile ad spending is expected to grow from from $1.7 billion in 2007 to between $10 billion and $15 billion 2011, according to Heavy Reading, a telecom research firm. This means Google may see up to $9.2 billion in revenue from mobile search in 2011, assuming Google maintains its Nielsen Media estimated 61% mobile search market share.
Strong Financial Position
Google generates a large amount of cash from operations and, as a result, has a hefty $12.7 billion in cash and short-term investments. The company doesn't have any long-term debt. This will aid in Google's ability to invest in the future and will allow the company to navigate through this time of economic uncertainty.
| 2008 (Q2) | 2007 | 2006 | 2005 | 2004 | |
| Cash Flow From Operations | $3.6 bln | $5.8 bln | $3.6 bln | $2.6 bln | $431.6 bln |
| Cash | $7.4 bln | $6.1 bln | $3.5 bln | $3.9 bln | $.44 bln |
| Short Term Investments | $5.4 bln | $8.1 bln | $7.7 bln | $4.2 bln | $1.7 bln |
| Current Ratio | 7.0x | 8.5x | 10.0x | 12.1x | 8.5x |
| Long-Term Debt | 0 | 0 | 0 | 0 | $2 mln |
*data from Thomson Reuters
Attractive Valuation
Given Google's healthy growth prospects, its stock offers an attractive valuation for investors.
| Valuation | | Yahoo | S&P 500 |
| PE TTM | 21.8x | 17.1x | 13.6x |
| PE TTM 3-yr Average | 57x | 43.2x | 18.8x |
| PE 2008 | 17.4x | 27.9x | 13.1x |
| PE 2009 | 14.3x | 23.2x | 11.5x |
| Expected Long Term Growth | 26.0% | 18.4% | 12.1% |
| Price-to-Growth | 0.7x | 1.5x | 1.1x |
*data from Thomson Reuters
Expect to see some volatility:
Google's biggest risk in the near term is weakness in the global economy, which will likely cause companies to cut back on ad spending and therefore crimp Google's revenue growth. If Google is unable to rein in costs and capital expenditures as revenue growth slows, profit margins will decrease, and its near-term earnings expectations will be lowered.
Although Google is the dominant name in search, there is always the possibility of a competitor creating a better search engine. Microsoft, which has access to more resources, has made it clear that it wants to expand its search capabilities. In addition, Google's partnership with Yahoo may be rejected by regulators, which would raise the possibility of Microsoft renewing its attempt to acquire Yahoo.
A total of 52% of Google's revenue comes from outside the United States. If the dollar holds or extends its recent gains, Google may be negatively impacted in the fourth quarter and in 2009. The company does participate in hedging programs, which should offset some of the negative currency impact.
Summary
Shares of Google are likely to see some volatility in the near term as revenue growth slows due to the sluggish world economy. However, Google has the financial resources to weather a worldwide economic slowdown.
Once the global market recovers, the company is positioned to dominate search as well as benefit from increased Internet and mobile advertising revenue. As a result, Google's current price marks a good time for long-term oriented investors to initiate a position.
Original Source :
(Disclosure: Briefing.com has a business relationship with Google, Microsoft, Yahoo! and AOL).
