An Overview Of 5 Web Search Titans

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Are there any compelling stocks in web search? Yahoo! (NASDAQ: YHOO)Facebook (NASDAQ: FB)AOL (NYSE: AOL)Google (NASDAQ: GOOG), and even Microsoft (NASDAQ: MSFT) compete in this space. Which, if any, are compelling investments?

Search is Picking Up

Google’s fourth quarter results topped analysts’ expectations as companies sought to reach their customers using online advertising during the holidays. Reported net income was about $2.9 billion, representing a 6.7% increase. Though many stores closed for the holidays, customers were able to get items by making online purchases. E-commerce spending went up by about 14% and Google was able to cash in on these deals for several months before and during the Christmas holidays. Many more retailers also took advantage of Google’s advertising products to keep their customers aware of the available goods and services and how they can be purchased.

Google ventured into mobile advertising, and the revenues on that front helped to complement those from traditional computer adverts. Mobile adverts are cheaper than desktop versions and so the profits were not expected to be high, but Macquarie Securities analyst Benjamin Schachter indicated that the company was doing quite well on that front. According to Schachter, “The transition to mobile is still a work in progress but they are showing they can manage that process quite well.”

The company that owns the largest search engine also benefited from the amount advertisers paid for clicks on their promotions. The general number of clicks increased though the cost per click had gone down. Revenues went up and the company was able to sell its Motorola Home unit to Arris Group for about $2.35 billion. International markets, led by Northern European markets, also contributed to the great fourth quarter results by representing about 54% of sales. The company’s Chief Executive Officer Larry Page affirmed that 2012 was a good year for business and the company expected to do better in the future. According to Page, “I am incredibly optimistic about the opportunities we have as a technology company focused on user benefits.”

Google acquired Motorola Mobility Holdings for about $12 billion, and the phone maker is expected to continue making smartphones that will run on the Android platform. Motorola is still making losses, but it is expected to perform better in the near future considering that about 4000 employees had to be laid off and 90 facilities were closed down. It can focus better on phone-making, especially since the home unit was sold off. Chief Financial Officer Patrick Pichette indicated that Motorola was making good progress with regards to handset manufacturing, and efforts are in place to ensure that profits are realized. According to Pichette, “We do care about profitability and that is our goal with every one of the areas where we invest.”

Google continues to be the market-leading search engine and Android, its free smartphone operating system, also leads its market. These products holds about 67% and 72% market share, respectively. Google’s web search may, however, face stiffer competition from Microsoft’s Bing search engine if the partnership of the latter with Facebook materializes. Facebook intends to launch a search tool for people, places, photos and interests that could be very successful considering that the company runs the largest social-networking service.

The partnership will see Facebook work with Microsoft on the search tool so that Bing provides additional results from the Web or other sources that Facebook cannot access. The search tool could be a success going by the number of Facebook users all over the world, and it may reduce the use of Google to search for people or photos or places.

Price Multiples and Growth

The valuations of these firms are wildly different, as are their historical annualized sales growth and projected annualized earnings growth:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>EPS Growth Next 5 Years</strong></p> </td> <td> <p><strong>Sales Growth Past 5 Years</strong></p> </td> </tr> <tr> <td> <p><span>AOL</span></p> </td> <td> <p><span>AOL</span></p> </td> <td> <p><span>3.11</span></p> </td> <td> <p><span>1.3</span></p> </td> <td> <p><span>27.5%</span></p> </td> <td> <p><span>-22.3%</span></p> </td> </tr> <tr> <td> <p><span>YHOO</span></p> </td> <td> <p><span>Yahoo</span></p> </td> <td> <p><span>6.23</span></p> </td> <td> <p><span>4.86</span></p> </td> <td> <p><span>13.8%</span></p> </td> <td> <p><span>-6.5%</span></p> </td> </tr> <tr> <td> <p><span>MSFT</span></p> </td> <td> <p><span>Microsoft</span></p> </td> <td> <p><span>15.14</span></p> </td> <td> <p><span>3.16</span></p> </td> <td> <p><span>8.4%</span></p> </td> <td> <p><span>7.6%</span></p> </td> </tr> <tr> <td> <p><span>GOOG</span></p> </td> <td> <p><span>Google</span></p> </td> <td> <p><span>24.19</span></p> </td> <td> <p><span>5.16</span></p> </td> <td> <p><span>14.3%</span></p> </td> <td> <p><span>24.8%</span></p> </td> </tr> <tr> <td> <p><span>FB</span></p> </td> <td> <p><span>Facebook</span></p> </td> <td> <p><span>2854.5</span></p> </td> <td> <p><span>12.15</span></p> </td> <td> <p><span>29.8%</span></p> </td> <td> <p><span>101.6%</span></p> </td> </tr> </tbody> </table>

Yahoo! is cheap based on restructuring. Its future price-to-earnings ratio is projected to be 16.9. This is not attractive considering that the average S&P 500 trailing price-to-earnings is about 14. Likewise, AOL appears cheap based on historical earnings, but its forward P/E is 18.9

Google's stock valuations are high, but they are not as wildly high as those of Facebook. Facebook’s valuations are out of this world. FB shares are trading at an unfathomably high 2854.5 price-to-earnings ratio and a perplexing 12.15 price-to-sales ratio. Investors should stay away from this or any stock at these price multiples.

In contrast, Microsoft is reasonably priced. Its historical price multiples are reasonable, and its 8.7 forward P/E is desireable.

Conclusion

Microsoft is the best stock in the search industry. It is too early to predict how much the Facebook-Microsoft product will threaten Google’s dominance in the search engine industry. However, Microsoft is kind of like a call option that benefits from the success of a partnership with Facebook. However, unlike Facebook, it is attractively priced and would be an acceptable stock, even if this search business goes nowhere.


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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