Search for the Most Lucrative Search Engine

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

The technology sector has been on fire this year, easily outperforming the S&P 500. Although companies like Apple and Facebook receive a heavy amount of attention, one major tech titan has quietly broken out to new all-time highs.

The Birthday Jump

Having celebrated its 14th birthday recently, Google Inc (NASDAQ: GOOG), the world’s leading search engine, has been trying to find a new all-time high since hitting a peak of $747 a share nearly five years ago. Within a year of topping out at that price, shares hit as low as $260 in the midst of the credit crisis. Since then, shares have slowly climbed their way back to new all-time highs, and I believe there is more upside.

On Monday, Google hit a new all-time high of $750 a share, giving the company a larger market cap than IBM. The move was highlighted by analysts raising their price target on to $850 from $740. The company is expected to increase its ad spending to around 20 percent in the third quarter, and new efforts to monetize Google Maps will help boost revenue. We're not sure what's driving Google, but it's been on a run for a while now. Our best guesses: YouTube is growing, Android is dominating, search isn't going anywhere, display is growing, and Facebook isn't the threat people thought it might be.

Google had been lagging much of the stock market earlier this year amid concerns about regulators' investigations into the company's business practices and its recently completed $12.4 billion acquisition of cell phone maker Motorola Mobility. Google eased some of the worries about Motorola becoming a financial albatross last month when it announced plans to lay off about 20 percent of Motorola's workforce, or about 4,000 workers.

Investors have also been betting that the antitrust investigations in Europe and the U.S. will be resolved without weakening Google's moneymaking prowess. Google has also made strides with its Android mobile phone technology, which research firm IDC estimates dominated the global smartphone market in the second quarter, with a 68 percent share, compared with Apple’s 17 percent.

The company is on a growth spree with revenue growth of 23.99% and earnings growth of 25.75%. The P/E of Google is 22.58 against 14.74 of Microsoft and 17.84 of Yahoo!. While the EPS is $8.42 and debt/equity ratio is 9.59%.

The amount of resources and skill required to really succeed in Search are very significant, as Yahoo and Bing’s limited results to date demonstrate.

Searching for search partners

At an event in Tokyo to debut its new Nexus tablet computer to the Japanese market, Google CEO Eric Schmidt said that the Internet search giant wanted to partner with Yahoo! Inc. to support its web search functions.

Currently, Microsoft Corporation’s (NASDAQ: MSFT) Bing search engine drives Yahoo’s web searches. Forbes noted there’s a lot to expect from Microsoft which is one of the 50 companies which has the highest dividend yield at 3.12%. The revenue growth of 6.89% and earnings growth of 5.33% makes the investors keep a strong watch and with a P/E of 14.74 and a debt/equity ratio of 18% its definitely a strong BUY.

Yahoo’s search engine deal with Microsoft goes back to 2009. Under the terms of that arrangement, Yahoo! can ditch Microsoft as soon as next year. Most analysts do not consider the Microsoft-Yahoo! search engine deal a successful relationship for Yahoo!, but warn that government regulators might block a similar deal with Google on anti-trust concerns.

With new Yahoo! CEO Marissa Mayer looking for new strategies to revive Yahoo’s fortunes, the time might be ripe to consider a new search engine partnership. Mayer has indicated she intends to ramp up spending to attract talented employees and burnish Yahoo's products in an effort to keep Web surfers on the company's website for longer periods of time. Analysts also believe she may pursue acquisitions with a portion of the $4.3 billion after-tax windfall that Yahoo! is getting in exchange for selling half its stake in Chinese Internet Company Alibaba Group. The P/E of Yahoo! is 17.84 against 14.74 of Microsoft, while the EPS is $0.18 and debt/equity ratio is 1.04%.

However, Schmidt’s comments about a possible deal suggest that regulatory hurdles may not be as high as they were previously.

As the chart above shows, Google is firing on all cylinders. Shares of the company have surged more than 30 percent in the past three months. Strong resistance between $625 and $650 kept shares in check over the past two years, but this barrier is now long gone. On Tuesday, shares jumped 1.8 percent to reach another all-time high of $764 and ultimately closed at $749.

Growing strong

The $850 price target is based on a price-to-earnings multiple of 15, which is not a stretch by any means and very similar to Apple’s modest multiple. Google’s YouTube business alone is around $3 billion a year. and that could actually surpass both Yahoo! and Facebook in total display revenue within the next three years. That’s part of the value in Google that I think the market isn’t seeing. The market will see more upsurges for this tech giant in near future.

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SomnathGuha has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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