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Google: The Internet Kingpin

The biggest name in IT these days is Google [GOOG: 328.05, 0.00 (0.00%)], the Internet powerhouse that has extended its reach throughout the Internet via its powerful search engine and an increasingly noticeable advertising presence. The Mountain View, CA company has surpassed the power of rivals Yahoo! [YHOO: 12.86, 0.00 (0.00%)] and Microsoft [MSFT: 20.52, 0.00 (0.00%)] to claim the throne as search engine king. The two competitors have been locked up in a rough takeover battle until recent and continue to let Google runaway as the industry leader. IT companies seem to be a group that can weather rough waters, the question is whether Google can also join the group as a long term hold.

Industry Overview

The online search industry has three main players, Google with over 60% market share, Yahoo at 20%, and Microsoft’s MSN at around 8%. The business has seen a great revolution, going from vanilla search to online hubs for information and also has become the largest source of online advertisements. The introduction of online networking and video sites expanded the potential of advertisement and information available. The latest rush is to monetize the value provided by these two mediums. The ongoing acquisition of DoubleClick should provide a further boost for Google in the realm of advertising as the company is already working to grow revenues from YouTube. The competition is fierce, and Google’s innovative powers have kept it at the top making it difficult for the jaded technology icons.

Innovation at it’s Best

Google’s core business encompasses online search and advertisements, the company is also developing online tools that improve information processing and collaboration. The key to Google’s success is not just the commitment to innovation but also the passion each employee has for revolutionary thought that can change the way we live. Google has not only garnered the title of #1 Search Engine, but it is moving forward by revolutionizing the Internet as a computing platform. Microsoft is struggling to keep up as management did not view the Internet as a place to collaborate on documents, communicate, and also efficiently disseminate information.  Google is growing as the world grows and it is setting the standard for it’s fellow competitors. Below are few lesser known areas Google has entered to provide its expertise and grow in through its innovation:

• Cell Phone Computing
• Health Care
• Transaction Systems
• Security

These projects are the newer area Google is spreading into, in addition to its popular GoogleDocs which is gaining popularity with free Office applications. Google Earth has also been a hit where users can see places around the world with a click of the mouse. Breaking into Health Care, Google is offering secure online platforms to store records and is moving into labs to help organize and store experimental information. In order to reap the rewards of eCommerce, Google introduced Checkout which provides online transaction processing capabilities and seems to be a solid addition to the family although it has been slow to catch on. The need for grade A security is evident as more information is stored electronically, and once again Google is developing solutions in that arena as well. Releasing these services under beta versions helps attract users and fine tune the products.

Currently, GE and the US Government use GoogleApps, but licensing terms and such are not known. I wonder how they can funnel revenues from these products so they can diversify away from advertisements. I believe it would be beneficial to provide customizable services  to corporations and provide quality products that exist on the Internet platform. This will diversify revenues and help Google enter the corporate vendor market, however at this time no ideas have been revealed for income generation. Besides these developments, Google’s most interesting idea is still being developed and should be out soon, Project Android.

Google v. Apple

Apple’s [AAPL: 94.58, 0.00 (0.00%)] iPhone has revolutionized the world, bringing computing to one’s fingertips and Google was quick to catch on. Teaming up with the likes of Verizon [VZ: 32.48, 0.00 (0.00%)] and more than 30 other mobile technology companies Google has built an open source mobile phone platform named Android. It is rumored to have capabilities that will give the iPhone a run for its money. Google Mobile will be given a large boost if Android is as great as it is touted to be. The folks at Google have not let us down yet and I expect Android to live up to the hype and be a strong force in the cell phone market.

So is Google worth it?

I have provided you with solid evidence that Google is stoked with ideas and continues to build on its core strengths moving forward. Lets take a look at the basics and let the numbers talk for themselves.

• Price: $477.12
• P/E (ttm): 32.15x
• EPS (ttm): $15.22
• 5 year EPS Growth: 96.68%
• PEG: .95x
• ROI (ttm): 20.58%
• Operating Margin (ttm): 30.00%

All data from Reuters Online

The PEG is below 1.00x signaling more growth to come as the 5 year EPS is also poised for high growth in the long term. On a P/E basis, Google is undervalued in respect to its competitors and provides a solid ROI that trumps the likes of Yahoo and Microsoft. The numbers talk and the company strategy supports the growth we see. Like any other company,  there are risks associated with Google that we must be aware of.

Risks…

• Advertising being cut as we flirt with the idea of recession
• Decrease in checkout usage as consumers cut spending
• Android unable to break the ice and gain market share
• Consumers and Corporations being nervous about storing sensitive information electronic through Google
• Acquisition of DoubleClick

The one risk I am most weary of is the ad revenues being affected by less spending as consumers stop spending and business cut discretionary budgets to preserve capital. However, I believe at the levels Google is trading at, the company is a sure long term steal. It has surpassed $700 in the past year, but has come down to lower levels as the economy slows. If we experience anymore price declines, it will become hard not to scoop up a fair amount of stock. Q3 will provide some insight on advertising revenues that have come under pressure with the recent earnings. Management did mention that recent earnings were lower than expected due to various maneuvers to maintain the balance sheet and not due to the economic environment and ad revenue. Overall, Google is a company with a great presence and vision to continue its growth for quite a time to come.

-Santosh Sankar

Disclaimer: The mutual fund the author is associated with is long GOOG and MSFT.

The Following Stocks Were Mentioned In This Article: AAPL, GOOG, MSFT, VZ, YHOO

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• A Yahoo! Without Yang

• Tuesday’s Market Recap (9/2/2008)

• All Eyes on AT&T Earnings

• The IT Spending Slump

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