- Google has solid revenue growth, profitability and cash flows.
- Google's long term outlook looks strong as non-core business also accelerates.
- Google valuations are attractive for long term investment.
Google’s (NASDAQ:GOOG) stock price has risen by about 13% from its lows earlier this year following a disappointing Q1 2014 earnings release. Though Google’s results were a tad disappointing, the company’s financials weren’t as bad in absolute terms. At its current valuations, Google is an attractive investment for the long term. Google has been one of our top stock picks for over a year now. The stock has returned about 33% since we added it to our top stock picks in May 2013. We explain why we like Google stock and why it is attractive at its current stock price in our valuation videograph of Google.
Google Revenue Growth
Google has delivered stable revenue growth and profitability over the years and continues to show strong growth on its massive revenue base. Google’s revenue has grown at a Compounded Annual Growth Rate (CAGR) of 22.4% over the last 5 years to reach $59.8 billion in FY 2013.
Given that Google has recently sold its Motorola segment to Lenovo, it would be useful to understand Google’s financials excluding Motorola. After adjusting for revenue from Motorola, Google’s revenue has registered a 5 year CAGR of 20.6% to reach $55.5 billion. Viewed in this light, Google’s Q1 2014 Year on Year (Y/Y) growth rate of 19% is healthy.
Google derives its financial strength from its core business which contributed $50.5 billion of its total revenue in FY 2013. With its robust growth and strong cash flows Google’s advertising revenue propels the overall growth of Google and gives it the financial flexibility to pursue its wide range of ventures. Google’s recently launched programmatic video ads buying platform could boost monetization from video ads, given that Google properties (primarily YouTube) have the highest video viewership in the US.
However, Google’s non-core businesses which summed up to $5 billion in 2013 revenue are the ones to watch out for in the coming quarters. Though these businesses account for less than 10% of Google’s total revenue, the segment is sizeable in absolute terms.
In recent times, Google’s growth in non-core business revenue has picked up pace and could drive growth in the years to come. In FY 2013, Google’s non-core business grew by 111%, way faster than its 5 year CAGR of 49%. The company’s increased focus on digital apps and content distribution and hardware such as Google Glass, smartwatches and smartphones could begin to drive Google’s growth in due course.
Google Profitability & Cash Flows
Google’s profit margins have contracted over the last 5 years. In FY 2012 and FY 2013 the decline in profitability has been partly due to Google’s loss making Motorola segment which it has now sold to Lenovo. In spite of that, Google’s 2013 operating and net profit margins of 23% and 22% respectively remain noteworthy, given the wide range of new businesses that it has ventured into.
In Q1 2014, Google’s headcount included Motorola employees, compressing operating profit margins while M&A and legal expenses dragged net profit margins. The recent sale of Motorola should reduce the pressure on profit margins in the coming quarters. However, rising Traffic Acquisition Costs (TAC) and spends on expansion of businesses like Google Shopping Express could offset the benefit in the short term.
Google’s consistently strong cash flows translate to cash and marketable securities in excess of $58 billion on the company’s balance sheet. Strategic acquisitions like that of Nest and Skybox or simply the ability to acquire companies using its strong cash pile is a big competitive advantage.
Google Stock Valuation
Google currently trades at a stock price of $586 a share and is attractive at its current valuations. That said, one must be aware of the risks. Recently, Google was hit by user privacy regulations in the European Union. Similar issues have cropped up in other regions as well. Since May 2014, Google has received 70,000 “right to be forgotten” requests in the EU alone. Apart from the costs associated with handling such requests, curbs on user related information that Google possesses could hurt its advertising revenue.
Everything said and done, one must note that Google still processes about 90% of the search queries in Europe, and that’s not going to change in a hurry. Google is the world’s largest search engine with no real close competition, except in regions like China and Russia. Google’s dominance over the internet search industry ties its prospects to the inevitable growth of the internet and internet businesses.
Google’s PE Ratio (Price to Earnings) of 30.4 and Price to Sales ratio of 6.5 translate to cheaper valuations when compared to peers like Baidu (NASDAQ:BIDU) and Yandex (NASDAQ:YNDX). Both Baidu and Yandex are great companies with relatively faster growth and higher profit margins. However, they are relatively more vulnerable to political and macro-economic risks stemming from their home countries, China and Russia respectively.
Stable growth and profitability, strong cash flows and a strong future outlook make Google an attractive investment option. Our Google stock analysis assigns it a buy rating in line with our long term view of the stock.