- Growth in Google’s Core business is robust.
- Motorola sale will boost growth and profitability.
- Post a near 10% pullback in the stock price, GOOG is attractive.
Recent events like the annexation of Crimea and China’s economic slowdown have triggered a slide in financial markets, presenting investors with attractive entry points. At $1114 a share, down nearly 10% from its 52 weak high of $1228 a share, Google (NASDAQ:GOOG) is an attractive long term investment.
Google’s latest quarter, Q4 2013 was marked by two distinct positives, the sale of Motorola to Lenovo and the performance of its core business. Google managed to beat revenue estimates for the quarter even as revenue from its Motorola segment declined over Q4 2012 (Y/Y). While Lenovo may be in a better position to leverage Motorola’s hardware business, the move is a definite positive for Google, whose overall business performance was being dragged by Motorola.
Google’s sale of Motorola
To sum up the deal quickly, Google would sell Motorola Mobility to Lenovo for $2.91 billion and retain a majority of the patents it acquired from Motorola in 2012. While it might have appeared as if Google was swallowing a big loss after acquiring the company for $12.5 billion, our Q4 earnings review of Google explains how the loss might be limited to $216 million.
In FY 2013, revenue from Motorola grew by a meagre 4% Y/Y. However, Motorola’s Q4 performance saw a Y/Y decline in revenue thus dragging Google’s overall revenue growth rate. Further, one can also expect Google’s profit margins to look healthier without Motorola’s operating losses (Non GAAP) which more than doubled Y/Y in Q4 2013.
Google’s core business is robust
Google’s core business is strong, and contributed about 85% of its total revenue in FY 2013. In Q4 2013, ‘paid clicks’ grew at 31% to offset a decline in the average ‘cost per click’ (CPC).
|Total revenue (in million $)||37.9||50.1||59.8|
|Total Ad revenue (in million $)||36.5||43.6||50.5|
|Ad revenue from Google sites (in %)||72||71||74|
|Ad revenue from network partner sites (in %)||28||29||26|
Google also saw revenue from ads hosted on its own sites grow at 22% vs 3% growth in ads hosted on sites in its ad-network. Both Baidu and Yandex have seen a larger chunk of revenue coming from their networks in their corresponding quarters. Given that ads on own sites generate more revenue than those on ad-network sites, the company will be hoping that this trend continues.
According to Google, advertisers have reported better ROIs on ad spends since the introduction of ‘enhanced campaigns’ in 2013 to help advertisers create ad-campaigns that run across multiple devices.
Google is doing a lot to bolster advertiser confidence. To measure advertiser’s ROI, Google has been developing a host of its own metrics and tools such as the ‘estimated total conversion’ metric to assess conversion rates for ads. However, for about 2 years Google had been refusing to place Nielsen’s ad-performance tracking tags called ‘Online Campaign Ratings’ or OCR on its ads on Youtube.
The fact that it has now reversed its stand could go a long way in reinforcing Google’s reputation as a brand management tool. Nielsen’s study will give advertisers a third party metric to measure ROI on ad spends and also increase transparency of the ad platform. Further, many believe that the results of Nielsen’s study could trigger the shift of TV ad spends to YouTube.
Google’s individual tie-ups with Yandex and Facebook to allow each other’s clients to cross-bid for ad spaces on the other’s ad networks should serve as a positive for its display ad-revenue. Though it is too early to quantify the impact of the move, the partnership should result in a larger pool of bidders, boosting revenue for sought-after ad-spaces.
Google: Outlook and Valuation
Google’s revenue outside the UK and the US grew twice as fast in Q4 2013 reflecting the opportunity in some high growth pockets. Further Google’s ‘other revenue’ from non-core business like hardware (Nexus handsets) and digital apps sales (Google Play store) will be worth observing after it nearly doubled Y/Y to $1.6 billion in Q4 2013.
Google’s operating margins could shrink on account of estimated higher traffic acquisition costs (TAC) and data centre costs. However, where earnings per share (EPS) is concerned, if revenue continues to grow at a healthy pace, revenue growth could offset the squeeze in margins. With Motorola off its books, one would expect to see improvements in revenue growth and profitability.
Google currently trades at a P/E multiple of 29 and Price/Sales multiple of 6.3. Though its P/E is closer to its Last Twelve Months (LTM) peak of 32, its LTM PEG (Price/Earnings to Growth) is at its 1 year low making it an attractive entry point for a long term investor interested in investing in the Google stock.
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