Google Is Cheap After Underperformance

By Ashish Sharma - July 5, 2012 | Tickers: AAPL, FB, GOOG | 0 Comments

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Google Inc. (NASDAQ: GOOG) has significantly underperformed the broader markets year to date (YTD), declining ~9% compared to NASDAQ’s 14% gain. The stock is currently trading at a forward PE of just 11.67, which is too low for a company with a dominant market position and good growth prospects. The company is likely to post high teen (or greater) growth rates if we go by consensus estimates (see table below).

Table: Google Inc. income statement/estimates (all figures in millions except EPS data and gross margins)

Source: Thomson Reuters.

Google is taking some impressive steps in terms of capitalizing the opportunities in mobile and display markets, launching new products and mitigating risks, which are likely to drive its growth in the long term. Here is a look at some of them.

Capitalizing on the Opportunities:

• Monetization of Google’s Product Search:

Google recently announced that Google Product Search will be changed to a commercial model built on Product Listing Ads, which will be called “Google Shopping." The transition in the US will be completed in the fall, and other countries will follow in 2013. Similar to Product Listing Ads, Google Shopping will be based on a combination of relevance and bid price. This particular move is aimed at improving user experience by giving merchants an incentive to keep data feeds fresh and up to date. This particular move provides an incremental revenue opportunity for Google and could be a genuine catalyst this coming fall. This is the first time Google has monetized a product that was free earlier, giving investors renewed confidence in long term monetization possibilities.

Source: Google Ecommerce Blog

• Google Display Network:

Google Display Network (GDN) is currently the world’s largest online display advertising network, comprised of Google properties including Youtube, Blogger, Gmail, and 2 million other websites. It reaches around 90% of internet users, and 180 billion ad impressions are displayed each month. GDN Q1 2012 revenues were 2.9 billion, up 1% from the previous quarter. Many investors think that Facebook (NASDAQ: FB) will feed on the advertising market at the expense of Google. I believe these concerns are unfounded as GDN fares particularly well compared to Facebook advertising when it comes to advertising reach, ad performance, targeting options and ad formats. General Motor’s recent removal of advertising from Facebook is an example of this. With Google at the forefront in advertising, GDN could bring substantial revenue growth for Google.

It must be added here that Google’s video website Youtube is one of the most under-appreciated assets on the internet today. Youtube has increased user growth 20% Y/Y and page views by 40% Y/Y. With over 700 MM unique visitors, Youtube presents a huge market in the display advertising space. In 2011, YouTube had more than 1 trillion views, or around 140 views for every person on Earth. Currently only 3% of Youtube videos are monetized from display/video advertising. Clearly this presents a significant opportunity for Google in the future.

• Replacement of Native Applications with Chrome:

With Chrome displaying the functionality of supporting high end graphics applications in its web store, a new market of web-based applications is emerging in which Google is miles ahead, both a fore-runner and a lone-runner. As a result, we see decreased risk as the transition from PC to mobile devices occurs.

Mitigating the Risks:

• With the introduction of Chrome for IOS, Google mitigated the threat of Apple (NASDAQ: AAPL) taking up the traffic acquisition costs.
• Google is targeting market share in the tablet space with its recently announced Android tablet made by ASUS called “Nexus 7." The basic premise here is that 85-90% of search queries on tablets are from Apple IOS. With this step, Google is trying to reduce the risk of Apple gliding through with high value searches through Siri.

Introducing New Products:

• Getting into the consumer goods market: A growing budget for sales and marketing shows Google is willing to advance into the consumer good space and with the introduction of Nexus-Q for Television, Google has made its move to move into the customer’s living room.

• Google Glass, the next big thing: With the introduction of the prototype of Google Glass, Google gave a sneak peak of computing in the future. The prototype is still in its development phase and if Google is able to pull it off, it really may have something big in its hands.

To conclude, Google has done well so far as far as market competition and threats are considered. It has put a considerable effort in R&D and the time has come for it to pay off. With many ambitious projects still in the pipeline, low valuations, and good growth prospects, Google appears to be an attractive buy.

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