This Giant Will Go Even Higher

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

The internet advertisement industry might be the fastest growing industry around. We are moving into an era where businesses will be entirely dependent on online advertisement for success. Google (NASDAQ: GOOG) and Facebook are the two best positioned stocks to benefit from this trend. The primary concern for all internet advertisement based businesses is mobile monetization. In its recent earnings report, Facebook has revealed its mobile monetization strategy, but Google is yet to accomplish this difficult task.

Computing is shifting to handheld devices that have a different functionality as compared to conventional computing. ‘Explorer based’ browsing allows Google to publish adds on their website, as a large part of the traffic is routed through their search results. Smartphone applications minimize the usefulness of Google because users can access their destination through pre-installed applications. Therefore the market has been closely monitoring Google’s mobile monetization strategy and its ability to get the maximum out of Android. The company is facing heavy competition from Apple’s (NASDAQ: AAPL) iOS and there is a potential threat from Microsoft’s Windows 8. The search giant is depending heavily on the following factors to drive future growth:

   I.  Growth from areas other than search, primarily YouTube and Enterprise.

   II.  Successful conversion of the mammoth potential of Android into actual revenue and profit for the company.

   III.  Continued expansion in international markets due to growing market share of online advertisement.

   IV.  Becoming the leader in cloud computing, which can place it in a dominant position in the global arena. 

Fundamentals

Despite a worsening economy and shrinking advertisement budgets, Google was able to report a solid quarter. The market was expecting Google to report an EPS of $10.56 on revenue of $15.4 billion for its 4Q2012. The company reported an EPS of $10.65 and revenue of $14.4 billion, beating the earnings and missing revenue estimates. The company saw increased growth from international markets and a slight growth slowdown in the US market. The revenue growth for the quarter was healthy at 24%, despite fiscal cliff concerns and a generally weak economy.

During the quarter revenue of approximately of $8.4 billion was driven by Google-owned sites, while $3.4 billion came from partner sites. The company is focusing on increasing monetization from its mobile platform and YouTube. The failed attempt of Apple to launch their map application has given Google an opportunity to step in with iOS 6 map application. This application has become the most downloaded application on the iOS for 2012.

Internet Advertising

The real upside to Google can come from an increase in Internet Advertisement. According to estimates, the online advertisement business is still only approximately 20% of total advertisement spending. This should change with the growth in handheld devices and the reduced advertisement focus of businesses on television. YouTube, for example, is becoming a global phenomenon in terms of content streaming and has the potential to pick up slack from television advertisement. This is what makes Google such an attractive investment, the fact that it still has so much growth potential.

Bottom-line

Google is the most diverse global technology company today. It competes with Apple and Microsoft in the OS landscape, meanwhile challenging Facebook on the social front. Meanwhile its dominance in the search arena goes unchallenged. We are on the brink of a major shift in online advertisement and Google can be a primary beneficiary from this changing trend. I believe Google is still pretty cheap at a P/e of 14.7x and PEG of 1.2x. If we value the company with a P/E of 15x and consensus EPS estimates, we derive the following possible target prices.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>2013</strong></p> </td> <td> <p><strong>2014</strong></p> </td> <td> <p><strong>2015</strong></p> </td> </tr> <tr> <td> <p>Consensus EPS</p> </td> <td> <p> $           46</p> </td> <td> <p> $           54</p> </td> <td> <p> $              61</p> </td> </tr> <tr> <td> <p>Target Price</p> </td> <td> <p> $        779</p> </td> <td> <p> $        916</p> </td> <td> <p> $        1,035</p> </td> </tr> </tbody> </table>


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