Google for Value and Growth Investors
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Value investors usually focus on companies with rock solid competitive advantages, strong balance sheets, high levels of profitability and attractive valuations. Growth investors, on the other hand, often go for the businesses showing disruptive potential and outstanding long term growth opportunities. There are not many companies which could fit the criteria required by these two kinds of investors at the same time, but Google (NASDAQ: GOOG) is part of that select group.
The online search giant reported a revenue increase of more than 20% in the last quarter, and considering that the economic environment is not precisely buoyant for advertising spending, the numbers reflect the strength of both the online advertising industry and Google´s dominant position in it. Online ads are cheaper, better targeted and more efficient than traditional advertising methods, hence the sector´s resiliency in the context of uninspiring economic activity.
Google has an undisputed leadership position in such an attractive industry; according to data from comsCore, Google has more than 65% of the online search market, where most advertising profits are made. Yahoo (NASDAQ: YHOO) has been losing market share lately, and is now on the third position with nearly 14% of the market versus a barely higher market share of around 15% for Microsoft´s (NASDAQ: MSFT) Bing. Microsoft and Yahoo use the same search technology, so it makes sense to analyze them together, but they still they wouldn´t reach half of Google´s share if they were combined.
Not only is Google tremendously dominant in desktop search, as the business moves towards mobile the company looks even stronger. The Android operating system for smartphones has more than 50% of market share in the US, followed by the iPhone from Apple (NASDAQ: AAPL), which has nearly 31%. As emerging markets provide the next growth stage in the smartphones industry, Google should continue expanding its leadership due to lower income levels and much smaller carrier subsidies for the iPhone in those regions.
Google doesn´t charge a cent for Android, but the operating system provides the possibility to insert its products and services in the heart of the mobile revolution. Even in the iPhone, Google is the default search engine, although Siri and other moves from Apple could certainly erode Google´s business in that platform.
Overall, Google has a dominant position in its industry, and while the shift towards mobile could mean some adaptation challenges, the company has invested heavily over the last few years to secure its position in that business. An extraordinary brand presence, combined with a leadership position and technological advantages over its competitors give Google one of the most important qualities in the value investing book: an almost indestructible competitive advantage.
If we look at the numbers, there is no lack of motives to invest in Google; the company trades at a forward P/E of 12.5, which leaves ample room for appreciation in the middle term. Google has more than $44 billion in cash, compared to $4.2 billion in debt, meaning there is no financial risk in terms of balance sheet strength. With a ROE ratio in the 20% zone and gross margins in the area of 65%, Google is one of the most profitable companies around.
Those looking for growth may want to consider the fact that Google increased sales by a 29% annually over the last five years, and earnings per share grew at 24.5% per year during the same period. Online advertising is a growth industry, and Google is the undisputed leader in that business.
The company has recently launched its Nexus 7 tablet competing against the Kindle from Amazon (NASDAQ: AMZN) in the $200 price range. The product received very positive reviews from the critics, and sales have also been strong in this initial stage. The Nexus 7 is clearly the biggest challenge against the Kindle at this point, and Google could leverage its enormous ecosystem in its competition against Amazon in the tablet business.
YouToube is a platform with gigantic potential. The New York Post reports that YouTube currently has an audience of 800 million users around the world who watch some three billion hours of content a month. Even if the service is provided for free, the potential for advertising income is really outstanding.
Other ventures still need to prove their commercial viability, but they look really interesting, and they provide the disruptive potential growth investors like so much. Google has done a tremendous work with its self driving car, which could be the next big area of innovation in the automobile industry. Projects like Google glasses still look more like science fiction than real life products, but most breakthrough innovations usually start that way.
It’s not easy to find companies which look attractive from the perspective of both value and growth investors, but when you need to search for something specific these days, you know where to go.
acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Google, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.