Internet Giants: All-Set for the Next Growth Curve
Ranu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While analyzing an Internet company, I always try to find the answer to one question - Where does the company actually lie in the growth curve? These stocks have a track record of shooting up like a rocket. And, when they touch the trough - their growth story is almost over. In contrast, there are some stocks which are based on pure innovation. And every new innovation develops an interesting investing window – signifying that the growth story just got started. In this article, I have screened three Internet companies which are betting upon their initiatives on mobile monetization. And seeing their play so far, I think their stock will post solid performance in the upcoming quarters.
Baidu (NASDAQ: BIDU)
The Chinese internet giant's fourth quarter earnings were in line with the market expectations. All credit goes to the continuous penetration in online search marketing and the shift of offline to online ad budgets. Unlike the US, where majority of the population is using the Internet, only 42% of Chinese residents (at the end of year 2012) is using the internet. Out of this, 74% are mobile internet users. Clearly, there is a vast potential ahead for the company to cover the remaining Chinese market with an expansion in online ads.
It is also investing heavily in mobile technology to bring more focused ads on smart phones and tablets. In Nov., 12 the company issued $1.5 billion bonds which it will use to retire existing debt of $350 million. With over $1.1 billion net proceeds from this offering and $3.4 billion cash balance, we can anticipate further investments in existing search and brand ads, mobile searches, e-commerce, online videos, and cloud services. Talking about its online videos initiative, its controlling stake in iQiYi will help the company to increase customer targeting capacity and add a real-time bid solution.
In terms of valuation, its long-term growth rate is more than double the price to earnings ratio. Trading at price earnings growth ratio of less than one (undervalued) indicates it has much room to grow in future.
Google (NASDAQ: GOOG)
Google once again reported strong earnings in the fourth quarter of 2012. Under the strong leadership of Schmidt and Page, Google sites' revenue increased 22% year-over-year to $8.64 billion mainly driven by Google Shopping, YouTube, and mobile. Despite having only a decade and half of history, Google generated over $51 billion in revenue during 2012 and sports a market cap of $235 billion.
Google's higher mobile search market share, as compared to the PC search, is helping its shareholders, as mobile advertising spending continues to gain share. With the growing usage of mobile internet, mobile cost per click, and the number of Google advertisers using mobile ads are also showing an increasing trend. As per comScore, Google's Android OS represented 33.2% of the US smartphone market. In addition, its Android mobile phone software has become the world's No. 1 wireless OS.
Paid Clicks is another potential driver to solidify its market share, which has increased by a solid 24% year-over-year basis. The figure for paid click growth rose to 9% and cost per click also raised by 2% from the 3Q. I think that Paid Click's growth is the most important indicator of a healthy advertising ecosystem, as large percentage of Google ads monetize on a non-CPC basis.
Speaking of the hardware revenue, Google sales are in momentum. It’s Chromebook and Nexus 4/7/10 versions have posted solid sales growth. The combined revenue from hardware sales and Google Play generated $2.4 billion. The company is enjoying increased sales from the acquisition of Motorola Mobility. Last year Google's Motorola Home division was spun-off to broadband communications giant Arris for $2.35 billion. When this deal will finish, Google will have 7.85% of Arris as a result of which Google will own considerable part in broadband technology business too.
In terms of valuation, excluding few downsides in its stock price – the stock looks good at an operating margin of 27.6% and earnings per share of $32.47. Its low price earnings growth ratio of 1.26 reflects that the company has strong potential to see high valuation in upcoming years. With an enormous user base of 83% in the global PC search market and a share of 91.6% in the global Mobile search market, Google will remain the leader in search over internet for many years to come.
Facebook (NASDAQ: FB)
Under the iconoclastic leadership of Zuckerberg, Facebook generated stronger fourth quarter earnings. It reported 40% increase in revenue, with mobile ad revenue contributing 23% to the company's total ad revenue. Its improved performance on mobile is attracting more and more advertisers to the prospect of sponsored stories and adverts within apps on the social platform.
Facebook has always come up with attractive products on its platform in short intervals. Like the Gifts and Facebook Exchange (FBX), its new feature Graph Search should also bolster its online marketing initiatives. Its Real Time Bidding tool FBX, has enhanced the company's online ad revenue. Advertising rates for the company's News Feed ads have risen to 36 % in the fourth quarter. With FBX, marketers are exploiting the site's re-targeting; reaching customers that earlier visited their site.
In terms of valuation, with the current stock price of $27.85, Facebook is closer to its IPO price of $38 and has the potential to further strengthen its place in the market. Analysts are estimating price earnings growth ratio of 1.65 which seems fair enough to buy this stock for the long run. Seeing the accelerating growth momentum, Facebook is a strong bet for long-term growth.
Baidu, Facebook and Google are enjoying the leadership in the Internet Industry. All these stocks are also covering the increasing demand of the mobile internet market. Though there are some short-term downsides in their stock price because of some macro-economic issues, these stocks are well positioned to offset any kind of downfall. The Trio is likely to rule the internet market for many years to come due to their solid balance sheets, strong market presence and innovative business model.
Futuristics has no position in any stocks mentioned. The Motley Fool recommends Baidu, Facebook, and Google. The Motley Fool owns shares of Baidu, Facebook, and Google. 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!