Sky Is the Limit for Google

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

The Motley Fool clan puts it best, Google is so dominant that it's a verb. There are a number of ways to analyze a business, and a great way to unlock a company's strategic roadmap is to do a SWOT Analysis, which aids in breaking down a company's internal and external competitive scenario. A SWOT Analysis for such a gigantic company is no easy feat, as Google (NASDAQ: GOOG) operates in a rather secretive manner with minimal public announcements. 

Strengths

  • Brand Value: Google's brand identity developed over years of search engine dominance has been a major driver of its success. The brand value has aided in roping in more users, network partners and advertisers to Google's platform. 
  • Gateway to the Internet: Google is the number one Internet search property worldwide, competitors like Yahoo! are no way near sight. The general search engine's huge success has allowed Google to introduce a number of other vertical search platforms, many of which have enjoyed decent success. This aided significantly in integrating the numerous acquisitions Google has done over the years. In the U.S., Google holds 67% market share, which is significantly higher than Microsoft's share of 16.3% and Yahoo's 12.2%, according to comScore. 
  • Member Websites: The revenue sharing model of Google makes partners extremely sticky as a significant number of third party sites, artists, etc. are very dependent upon Google for generating a significant portion of their total revenues. Even though the revenue from Network Member sites have a lower operating margin relative to Google owned sites, the content and the revenue Google receives require less effort. And also encourages these member sites and partners to generate even more content, which in turn increases the Google top-line even more, creating a virtuous business cycle. 
  • Mobile Positioning: Google's position in generating revenues from Mobile Ads is phenomenal. It has a mobile run rate of more than $8 billion, a majority of which consists of mobile based ads, and the rest includes apps, movies, and music consumed by users on Google Play. 
  • Advertising Relationships: Due to the sheer dominance of Google's search engine, the search advertising business is championed by Google. And the company attracts marketers small and big like honey attracts bees. The growth in paid clicks, which is a key metric for Google, is up 33% Y/Y and 6% on Q/Q basis. 
  • Android’s market leading position in the U.S. and around the world as the No.1 smartphone platform has helped the company a lot in selling other Google services. There are half a billion Android powered devices, and 1.3 million are being activated everyday. According to comScore, it continues to gain market share and is significantly ahead of Apple's iOS, with ~54% market share in the U.S.

Weaknesses: 

  • Lower Ad Rates on Mobile: Due to the secular trend towards mobile based devices, the number of Ads being portrayed has increased substantially, but the cost per click (CPC) on mobile is lower. Also, as Google's reliance on emerging markets increases, the price per ad in many of these countries is relatively lower as well. This was a major concern for many investors when Google reported earnings in Q3, 2012.
  • Excessive Dependence on Advertising: A huge portion of Google's total revenues come in from advertising. However, it is not a major concern because Google is already making steady progress towards building a technological empire, i.e. Motorola, tablets, selling pay-per-view online content, etc. 

Opportunities

  • YouTube is already a major source of display advertising revenue for the company, thanks to its 800+ million unique users every month. It is already building up a large professional content library, and is slowly building up a big Internet TV platform. YouTube has the potential to disrupt existing TV and Media Businesses, and earn significant amounts for Google going forward. 
  • Google Fiber: Google has entered the marketplace for high speed Internet connections with connection speeds exponentially faster than other providers. There is a huge demand for higher speed access to Internet at reasonable prices in the US and elsewhere. However, it is still in the early stages and will be an expensive proposition.
  • Google Play represents a huge opportunity due to the extremely strong position of Android-based devices, most of whom have larger displays compared to Apple devices. Google Play is increasing its offering library of digital content and poses a strong threat for Apple's iTunes and also for Amazon's online store. 
  • Google+ is ramping up user engagement in its social media arm, by integrating it with YouTube, Gmail and Search. And also added Zynga's Games and other games and rolled out Google+ Solutions for Enterprise which features items like Hangout. And Google+ Local is increasingly taking on other companies focused on the local ad market like Yelp and Groupon. Google+ now has more than 135 million active users. 
  • Hardware Opportunities: Google has numerous hardware opportunities with its various partners, with the most notable being Samsung, to sell more Google Chromebooks, Phones, Nexus Tablets, etc. Selling these products allows Google to gain even more market share in other services like Play, Search, and YouTube. 
  • Cloud Infrastructure: Google has started to roll out Cloud Computing services, to take advantage of its massive-scale computing infrastructure by enabling smaller businesses and other developers to utilize it at a low cost. There are a number of big players in this space, but Google has the ability to position itself well over time. 
  • Motorola and Arris: Google paid $12.5 billion for Motorola, and $5.5 billion of that amount was attributable to Motorola's patent portfolio. Google is likely to come up with newer and innovative handset devices with Motorola using those patents. It already spun-off the Motorola Home business to Arris Group for $2.35 billion. Google will have a stake of ~15.7% in Arris, and with the addition of Motorola's Home business, Arris will be able to come up with very innovative cable and video based solutions and broadens its existing capabilities significantly. 
  • Google X is a separate independent division within Google, which undertakes highly ambitious and innovative projects, like self-driving cars and Google Glasses. In the long run, it might roll-out a few home-run services and drive earnings too. 

Threats

  • Competition in Search: Leading Internet search properties like Yahoo and Bing might come up with more compelling offerings. And regional competitors like Yandex can also pose more threats to the company by expanding on more geographic markets. However, Google is substantially ahead of all competitors. 
  • Facebook (NASDAQ: FB) might be able to snatch a little bit of market share from Google's core search engine business, with its socially driven Graph Search tool with Microsoft's Bing. Also, Facebook poses threats to Google in terms of Google+, and also for the advertising dollars from marketers. 
  • Online Ad Market is a very competitive place with a lot of companies vying for advertising dollars. Many of these companies, will be very successful down the road, and rake in more ad dollars. 
  • Regulatory Scrutiny: Thanks to the sheer size and market position of Google, it is always under some form of regulatory investigation, which take various forms ranging from business practices, search results to acquisitions etc. 

The Takeaway

As it is the gateway to the Internet it has a huge competitive advantage to realize a lot of synergies by introducing new business lines. It might miss earnings in a few quarters, due to overly optimistic sell-side analysts, but in the long-run, it has immense upside potential. 


Think you can add more? Put your thoughts in the comments below.


ishfaque has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure