Google: What's Next For This Tech Giant?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, Google (NASDAQ: GOOG) made headlines as it surpassed Microsoft (NASDAQ: MSFT) in market value, edging out the tech giant by almost $2 billion. Why this is news, as opposed to merely fodder for a trivia quiz, is unclear to me. The lead in this race will no doubt change many times over the coming days and weeks. To the investor, Google’s market cap relative to Microsoft’s is meaningless. Nonetheless, it piqued my interest in Google. In this article, I will analyze Google’s fundamentals in contrast to rival Yahoo!’s and I will look at catalysts that have potential to influence the share value of both enterprises.
Google’s market cap stands at around $249 billion and shares trade at about $762. In contrast, rival Yahoo! has a market cap around $19 billion and trades at a more modest $16, approximately. Google’s trailing twelve-month price to earnings ratio is less favorable than Yahoo’s 17.84, reporting at 22.58. The price to earnings growth ratios are less disparate with Google reporting 1.18 and Yahoo! reporting a slightly poorer 1.31. Google and Yahoo diverge significantly in terms of return on equity, with Google at 19.04% more than doubling Yahoo!’s 8.81%.
Quarterly year-over-year revenue and earnings growth for Google are reported at 35.3% and 11.2% respectively. Rival Yahoo! does not begin to measure up reporting quarterly year-over-year revenue growth of 0.9% and quarterly year-over-year earnings growth of -4.4%. In terms of financial strength and soundness Google and Yahoo! on largely on an equal footing. Google reports a debt to equity and current ratio 12.55 and 3.84 respectively, while rival Yahoo! reports a debt to equity and current ratio of 0.31 and 3.04 respectively. Neither Google nor Yahoo! offers a dividend to shareholders.
Much of Google’s recent growth has been inorganic. Examples include the acquisition of such notables as Motorola Mobility, YouTube and Android. In fact, Wikipedia reports that Google has acquired companies at the rate of one per week since 2010. Over its lifetime, Google has acquired well over 100 companies. Yahoo! has been a piker in comparison, acquiring just 64 companies despite being 3 years Google’s senior. Acquisition and acqui-hires (read “Shoudn’t Startups Be More Than A Segue To a Google Or Facebook Job?”) for more information on acqui-hiring) have been key factors in the growth of many companies in the technology sector and empirical evidence suggests that Google has leveraged this strategy more efficiently than its competitors.
Google has been extremely successful in acquiring companies that have clear synergies with its business objectives. Possibly the clearest example of this lies in Google’s efforts to monetize its Internet presence by acquiring Applied Semantics in April, 2003, followed closely by its acquisition of Sprinks in October, 2003. Both companies were online advertising firms and Google morphed these firms into AdSense and AdWords. The acquisition of online advertising firms DoubleClick in April 2007 and Teracent in November 2009 drove further enhancements of AdSense and AdWords. A review of Google’s acquisitions shows this pattern repeatedly, either applied to existing Google offerings or used to create new ones. I describe it as inorganic growth driving organic growth, and Google has it down to a science.
So what’s next? I expect Google to continue its focus on perceptive acquisitions (and aqui-hires). In my view, Motorola Mobility, as Google’s most costly acquisition to date, is a solid indicator of the direction Google is moving. I anticipate Google acquisitions to focus increasingly on mobile technology and ways and means to monetize the mobile market. Innovative start-ups and companies with proven records of accomplishment in mobile application development, eCommerce, user research and/or online branding will be on Google’s radar. Examples of companies with these attributes are Via Studios, Comentum Corporation, INTERSOG and Fusion Informatics Pvt. Ltd. to name a few. Via Studios, for example, is a U.K. based multi-discipline web design and development studio aimed at creating user friendly websites. The company's clients include BBC, Accenture (ACN) and PrintedSpace.com.
On the catalyst front, rumors suggest Google is acquiring Viewdle, a facial recognition software company based in the Ukraine. If the rumors are credible, it appears to be more of an acqui-hire, because all 36 employees will join Google. The rumor has legs, as Motorola Mobility was in talks with Viewdle prior to its acquisition by Google. Meanwhile, the only catalyst on the Yahoo! scene is the birth of CEO Marissa Mayer’s first child, a boy and as yet un-named. Yahoo! is treading water and Marissa Mayer, the third Yahoo! CEO in the past year, has a rough row to hoe in turning the company around. While it will soon receive a $4.3 billion financial shot in the arm from the sale of 50% of its stake in Alibaba Group, it may be too little, too late.
The best possible scenario for Google would be the demise of Facebook (FB). Google is competing with Facebook for advertising revenue and the Google+ social networking platform is beginning to gain traction. In my view, we will see further Google acquisitions that will enhance the Google+ segment.
As Google pushes forward on multiple fronts, Yahoo! struggles to get its ducks in a row. In my view, between these two companies, the clear investment choice is Google. I just wish they would entertain a split so that I could afford to invest
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