Google Has Huge Upside

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

Internet giant Google (NASDAQ: GOOG) has long dominated the search engine market without any hiccups. It continues to gain more revenue from the search engine space, and is ramping up its technological empire with newer business initiatives. Google just capped off its first year of more than $50 billion in revenues. As more and more revenues are flowing in from other directions, its upside potential is enormous.  

Increased Advertising Sales Offsets Motorola Losses

Google reported very strong numbers for Q4; revenues were up 36% year over year to end at $14.42 billion. However, operating income for the period took a hit thanks to losses of $353 million arising from Motorola Mobile. The operating margin for the fourth quarter spiraled down to 24%, which is down from the Q4 2011 operating margin of 33%. The Motorola Home division was spun off to broadband communications leader Arris (NASDAQ: ARRS) for $2.35 billion. After the deal is completed, Google will own 7.85% of Arris, which gives Google a sizable portion of the broadband technology business.

As more and more search queries take place, Google's core search business continues to deliver strong results. The most vital metric for Google is the number of ads portrayed, i.e. paid click growth; this figure rose 9% sequentially. The amount advertisers pay for each ad, the cost-per-click, also increased by 2% from the third quarter. 

Big Advertisers Are Spending Heavily

Google’s advertising revenues are performing very well across the board. According to Google's senior management, the top 25 advertisers are now spending an average of more than $150 million annually across Google’s search, display and YouTube businesses.

Google is maintaining its very strong position in mobile. Mobile cost-per-click (CPC) is expected to increase as more and more mobile devices are activated in the marketplace. And most of Google’s advertisers are increasingly using mobile ads for marketing products/services. This is great news for Google, as the secular shift towards mobile devices will lead to incremental revenues down the road.  

Hardware Sales Are Gaining Momentum

Google launched a number of new devices, including the Chromebook and the Nexus 7, Nexus 4, and Nexus 10 tablets. Revenues from hardware are now increasingly becoming a larger portion of Google's total revenue. Also, Google Play is increasingly becoming a bigger rival for Apple's (NASDAQ: AAPL) iTunes.

Google Play is signing newer deals to add content from leading film studios and music labels through the Android-run devices. Combined revenues from Google Play and hardware sales are growing rapidly, up 71% in 2012 to end at $2.4 billion. This is a great sign for investors, as Google continues to diversify its revenue sources.  

YouTube is Growing Fast

YouTube is well positioned for the changing viewing habits of the multi-screen world. And YouTube is increasingly attracting more and more artists. YouTube’s partner revenues have doubled for the fourth consecutive year, and is increasingly becoming a powerful tool for acquiring content. YouTube’s power to reach a global audience is increasingly attracting more and more global advertisers. Google’s top 100 global advertisers’ increased total advertising expenditure on YouTube by 50% in 2012 from 2011.

Also, YouTube was the No. 1 most downloaded free app in Apple’s app store for 2012 for iOS, and Google Maps was also a big success on iOS. Due to the debacle with Apple Maps, Google's Map function was downloaded more than 10 million times in less than 48 hours in iOS. And Google continues to invest heavily to build a better Maps function. 

Newer Strides

In addition, Google is making progress in the internet connection business with Google Fiber. It is still in the early stages, and is being tested out in only one city. However, Google Fiber will have 100 times the average internet speed, and has strong disruptive potential.

Google is also monetizing its shopping platform with more and more product listing ads. Google Shopping got strong reviews from merchants and users alike and is increasingly signing up more merchants. Also, Google’s Enterprise business continues to gain traction amongst the biggest companies in the world, and is now growing at a rapid rate. Large corporations and govt. agencies alike are moving their business to the Google Cloud.

The Bottom Line

Google's core search business is growing at a rapid rate, and is light years ahead of competitors. More importantly, Google is increasingly diversifying its revenue base, with increased sales coming from Motorola and Hardware sales. Google Enterprise and Google Fiber have very strong long-run potential as well. Google is growing its revenues, net income and free cash flow at a rapid rate, with no signs of slowing down. Clearly, in the long term Google has substantial upside. 

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

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