Google Gets Ready for Battle With Apple

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

Google (NASDAQ: GOOG) enjoys an overriding market share in search and is present in many other markets. The company's unimpressive fourth quarter can be attributed to a number of reasons, like algorithmic preferences for Product Listing Ads over more expensive AdWord clicks, aided by prominent placement of PLA above AdWord links, the advent of specialized and advanced applications that facilitate eCommerce and travel transactions without Google acting as an intermediary. Mobile users will be the center of all the strategies in the Mobile search segment.  The search engine giant is well aware of this, as they have aggressively moved into several markets that are not necessarily core to their search business.

Financials-Missed Expectations but Balance Sheet Still Strong

Google missed the market expectation regarding its third quarter earnings. Net revenue growth was 17.9% sequentially. GAAP Net Income was $2.18 billion in the third quarter of 2012, compared to $2.73 billion in the third quarter of 2011. Earning per share (Non GAAP) in the third quarter were $9.03 compared to $9.72 in the third quarter of 2011.

The otorola Mobility unit generated only $1.78 billion of revenue. The miss in Google’s core business came from an unexpectedly rapid drop in price-per-click. The growth of paid clicks was in line with expectations (+33%), but per click pricing dropped faster than expected (-15%).

Despite less than expected third quarter earnings, Google maintains a strong balance sheet, with a debt/equity ratio of only 0.11. Google has acquired more than 100 companies in 14 years and doesn't appear to be slowing down.

Tough Competition Ahead

While two years back only Bing and Yahoo! (NASDAQ: YHOO) were seen as potential competitors to the search engine giant, now Yahoo, Apple (NASDAQ: AAPL), and Amazon.com (NASDAQ: AMZN) are giving tough competition.

Forrestor research found that one third of online users started their product searches on Amazon.com compared to 13% who started their search on a traditional search site.

Amazon is not the only site which has proved to be a sturdy competitor. Apple's Siri can also provide wide functions and is capable of giving Google a tough time. Facebook (NASDAQ: FB) is also not lagging behind and is uniquely positioned to answer a lot of questions people want to know.

Mobile Foray

The acquisition of the money-losing Motorola Mobility was expensive, but it could be justified considering that it is trying to establish itself as a leader in the world of mobile devices in order to grow its ecosystem of products and services. Google expects that its ecosystem will challenge Apple in the coming years, and is making the investments necessary now in order to garner the profit.

Google inked a deal with mobile carrier billing company Bango to bring carrier billing to Google Play, beginning in Australia. The deal could help boost conversions and revenue for Android developers. Despite its greater market share, Google's mobile platform generates considerably less revenue and fewer paid customers than its competitor, Apple's iOS.

Positives

The new shopping experience of Google, which was converted from free to a 100% paid service in October, will act as the backbone of Google. PLAs (Product listing Ads) form the base of the user’s Google Shopping experience. Google is extracting revenue from these Ads on both cost-per-click (CPC) and Cost-per-action (CPA) basis. Around 70% of PLAs are monetized on a CPC basis and the remaining 30%, are monetized on CPA basis. In the coming quarters PLA, which asserts the most important impact on retail could also influence other categories, like travel and finance. Along with this, Mobile search may also result in increased revenue for Google.

CEO Larry page is poised on strengthening the most important segments of the company. As a result, Android has managed to become the world’s top Smartphone operating system.

Significant developments:

Immersion Corp announced that it entered into a License agreement with Google and Motorola Mobility Holdings to determine all the patent infringement litigation by Immersion over Motorola. The company is paying compensation to Immersion for the prior shipment of Motorola devices containing basic Haptic technology. Both companies have also agreed to the license for the future shipment of Motorola devices.

Opinion

In order to continue its growth, Google needs access to a wider range of content on which it can place ads and monetize them. The strategy requires massive investment from the company to build and buy platforms to reach new content, but is the only way which can help Google stand ahead of its competitors. The core business of the company depends upon desktop searches on Google owned and operated property. Google does not need to share any revenue with the publisher partners. However, there is a downtrend in the core business line of Google. Thus, the expected upshot from the monetization of PLA in the fourth quarter and downtrend of core business keep the stock one for your watchlist.


valuewalk has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Amazon.com, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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