GOOGLE INC. $677(Nasdaq symbol GOOG; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 327.0 million; Market cap: $221.4 billion; Priceto- sales ratio: 5.1; No dividends paid; TSINetwork Rating: Above Average; www.google.com) is the world’s top Internet search engine, with about two-thirds of this market. The company has held on to its lead because its well-developed search technology gives it a big advantage over its competitors.
Google does not charge for its searches. Instead, it makes money by selling advertising on its websites. It mainly does this through its AdWords program, which lets advertisers bid on certain search words or phrases. The company then charges advertisers when users click on their ads. Google gets around 97% of its revenue from advertising.
The company also offers free access to all or part of its other services, including Gmail (email), YouTube (videos), Google Books (electronic books), Google Talk (Internet-based phone calls), Google+ (social networking) and Google Chrome (an Internet browser). These services help draw more users to Google’s sites, which lets the company sell more ads and charge higher ad rates.
In 2008, Google launched Android, its operating system for smartphones and tablet computers. Android has been a huge success: It now powers around twothirds of the mobile devices in use worldwide.
Google provides this software to smartphone makers for free. But thanks to the rapid growth in the number of Android users, Google continues to increase its share of the mobile search market and attract more advertisers. It also earns fees from selling Android applications (or apps) through its Google Play website. There are now over 500,000 Android apps available.
The company’s popular services pushed up its revenue by 128.4%, from $16.6 billion in 2007 to $37.9 billion in 2011. Earnings rose 131.6%, from $4.2 billion in 2007 to $9.7 billion in 2011. Because of more shares outstanding, earnings per share rose a slower pace of 123.9%, from $13.29 to $29.76.
Motorola added valuable patents
In May 2012, Google completed its $12.4-billion purchase of cellphone maker Motorola Mobility Holdings. Of this total, $5.5 billion related to patents.
The company feels these patents will help it defend itself against lawsuits launched by competitors such as Apple and Microsoft. If successful, these lawsuits could block Google from licensing the Android operating system to smartphone makers or force it to remove certain Android features.
Google is now taking steps to make this business more profitable, including cutting 20% of its workforce and closing 30 of its 90 plants. Google expects to pay $275 million in severance and other costs.
Motorola Mobility will also shift its focus from regular cellphones to more profitable products like smartphones and tablet computers. It may also sell its home TV business, which makes set-top boxes for cable companies.
Google is already using Motorola Mobility’s expertise to launch new products. It recently started selling the Nexus 7, a new Android-powered tablet that features a seven-inch touch-screen display. Devices like this are less profitable for the company than its main search business, but they should attract more users to its websites.
Unique content gives Google an edge
The company recently acquired Zagat, which publishes reviews of restaurants, hotels, theatres and other attractions in over 100 countries. It is also buying Frommer’s, which publishes travel guides that cover over 3,500 destinations. Combining their specialized data with online maps and other services should help Google sell more ads to local merchants.
Google can easily afford to keep making acquisitions and investing in new growth projects. As of June 30, 2012, it held cash of $43.1 billion, or $131.89 a share. Its long-term debt is just $3.0 billion.
The stock has gained 36% in the past year. Even so, it still trades at a reasonable 18.9 times the $35.83 a share that the company will probably earn in 2012. Google spends a high 14% of its revenue on research, so it’s true p/e ratio is actually lower.
The company also aims to make its stock more liquid. Right now, Google has two share classes: the class A shares, which have one vote each, and the class B shares, which have 10 votes each. Only the class A shares are listed and traded.
Google recently created a new class of non-voting shares (Class C) that will trade on Nasdaq. Existing class A and B shareholders will receive one class C share for each share they currently hold, for an effective 2-for-1 stock split.
Split will make shares more affordable
Besides the better liquidity, the lower stock price will attract investors who have stayed away because the shares seemed too expensive.
As well, the company can issue class C shares as compensation for future acquisitions without diluting current shareholders’ voting power. Google aims to hand out the class C shares later this year.
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The Successful Investor Inc. and its affiliate Successful Investor Wealth Management (referred to hereafter as TSI Network) know that you care how information about you is used and shared, and we appreciate your trust that we will do so carefully and sensibly. This notice describes our privacy policy. By visiting websites owned by or associated with TSI Network, you are accepting the practices described in this Privacy Policy.
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