Google Shopping: What Does it Mean for Investors?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Birthed in the beautiful chaos of the dot-com boom, Google (NASDAQ: GOOG) has become one of the most iconic companies of the 21st century. While many of its peers have since floundered, Google has flourished, providing an all-encompassing network of web-based services rivaled by none. Originally founded as an ad-supported search engine, the company has extended its reach in recent years through countless acquisitions and in-house innovations. While YouTube and Gmail – two of the company’s most successful additions – are loved by millions, they are footnotes to Google Search.
In fact, a whopping 97 percent of Google’s revenues are generated from advertising, and over four-fifths of those dollars come from Adwords. This platform allows merchants to bid for space on Google’s search results in a pay-per-click format. Now, Google execs didn’t need an expert to tell them that they should try and diversify revenue streams at least a little bit; whether it was the company’s acquisition of mobile advertiser AdMob in 2010, or its release of Google+ last year, Larry Page and Co. have been working furiously to get revenues from other areas of business. Both of these attempts haven’t worked out for the best, as mobile ads have proven hard to implement correctly and Google+ has been extremely unpopular. Just to focus on the woes of Google+ for a second, statistics show that the average user spends only 3 minutes per month on the site, compared to 405 minutes for the average Facebook (NASDAQ: FB) user. Wow.
Last week, Google announced a move that shows its desperation to diversify: a completely revamped comparison shopping engine. Aptly called Google Shopping, the service used to be a place where merchants could freely build product listings to customers who could then compare and contrast those products. The redux, however, charges business to place listings on the site and does not even use the traditional Adwords system. While haters may cry out that Google is going back on its slogan “Don’t Be Evil”, they should take a look at the company’s competitors first. As of last month, Google’s shopping engine was the most popular of its kind on the Internet, followed by those of Amazon (NASDAQ: AMZN), NextTag, and PriceGrabber. Out of these four companies, Google had been the only one allowing merchants to post for free.
Going forward, this new service may finally be the harbinger of revenue diversification that the company has been searching for; we can see this by using Amazon as a comparison. In its early days, the online retailer did not offer merchants a way to pay for a leg up on product searches, until the introduction of Amazon Product Ads in 2008. It’s estimated that currently, the service gives the company around $1.5 billion a year. This is an encouraging sign for Google, which made over $37 billion in sales last year. If it can duplicate Amazon’s success, it will be able to decrease its reliance on pure search engine advertising by 5 to 10 percent. Yes, this amount seems small, but it’s certainly better than Google+ has done, with its three-minute-a-month user base.
From an investing standpoint, Google is a relatively good buy at the moment. For starters, it has a 3-year average revenue growth rate (20.3%) above the industry average (9.3%), and competitors like Microsoft (NASDAQ: MSFT) at 5.0 percent, and Yahoo! (NASDAQ: YHOO) at -11.6 percent. Moreover, GOOG has been able to translate this superior progress to its bottom line, sporting an equally impressive 3-year EPS growth rate of 30.8 percent. Despite this success, shares of the stock are currently trading at a Price-to-Earnings ratio (21.1X) below the industry average (27.1X), and its own post-IPO average (51.4X).
In fact, Google’s earnings have historically traded at a premium of 203 percent above those of the S&P 500. This year, they are trading at premium of just 50 percent. Using the consensus year-ahead EPS forecast of $37.53 in conjunction with the industry average P/E, we can set a price target just north of $1,000 a share by next summer. Heck, even if the stock remains at its current valuation, GOOG should flirt with $800 if earnings estimates hold. For what its worth, the company trounced its first quarter forecast by nearly 50 cents, reporting an EPS of $10.08, so it seems unlikely that year-end EPS figures will disappoint. Moreover, Google is sitting on a free cash flow of $11.1 billion that makes almost all tech companies – aside from Apple – jealous. More importantly, GOOG is trading at a Price-to-Cash Flow ratio (15.1X) below the industry average (15.5X), which is a claim that Apple cannot make.
In addition to the number of overwhelmingly bullish indicators surrounding GOOG, WealthLift’s Sentiment Index also rates it as a strong buy, with an overall positive sentiment from 85.87 percent of users. For more ideas on how to trade in these uncertain times, continue reading here.
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