On Wednesday, Google (GOOG) crossed the $800 mark with a company history high of $808.97. Soon, Google can have the privilege of claiming membership within an exclusive club, joining the company of Berkshire Hathaway (BRK.B), Seaboard (SEB), and NVR (NVR). Is this just the beginning for Google or is it topping off?
Google is a $262.1 billion company with 2.4 million shares traded (10-day average) daily that has its hands in virtually every sector of technology, including but not limited to search, advertisement, social media, mobile, hardware, media, networking, and now Internet/cable service. What's more incredible is that the company has achieved this empire while maintaining 0 long-term debt and a PEG of 1.7 compared to the 8.9 industry PEG. As of December 31, 2012, Google achieved 9.2% 1-year EPS growth and 19.55% 5-year growth compared with industry's (18.6%) and 19.55%, respectively. During the same year, Google achieved a 21.5% profit margin compared to 11.71% industry average. With a short ratio of 1.1 as compared to industry's 5.7, Google has a strong position right now and is geared for a strong future ahead.
Google's advertisement revenue stream is continuing to flow with more volume year after year as more websites are joining the Google Network and more third-party companies are purchasing the AdWord and AdSense advertisements. From 2011 to 2012, total advertisement revenue increased by $7.1 billion or 19.6%. Google revenues (excluding Motorola revenues) increased year-over-year by 21.5% while Google revenue costs (excluding Motorola revenue costs) increased by 30.2%. The increase in costs is due primarily to an increase in Traffic Acquisition Costs (TAC), higher advertisement fees for the AdSense program, and higher capital management costs. In 2012, TAC totaled $3.08 billion or 25% of advertisement revenue, 24.1% in 2011, 25.9% in 2010, and in 2009 TAC accounted for 27%. Furthermore, the cost of Google revenue as a percentage of revenue for 2010, 2011, and 2012 are 35.5%, 34.8%, and 37.3%. Cost of revenue has increased slightly due to the increase in TAC. Unfortunately, TACs are inevitable and can only be reduced to a certain extent, and it comes to a point when Google simply needs to garner greater revenue to compensate for inflated fees. However, comparing the TAC from 2009 to 2012, the costs have stayed relatively constant as a percentage of revenue and actually saw a decrease from 2009 to 2012. What is concerning, however, is that advertisement revenue currently comprises 95% of Google's total revenue, and like a non-diversified portfolio, that scares me. In the event that advertisement demand plummets in the future for some reason (economic plagues and such), Google's business model would be seriously maimed. Luckily, I believe Google has seen this pitfall for a while now, and is continually working to diminish the 95% dependency on advertisement.
As mentioned, Google reaps in profit from a variety of sources besides advertisement, including its android platform, its Nexus 7 tablet with a Nvidia (NVDA) Tegra processor, and recently the company has built infrastructure for its first Google Fiber community (Internet and cable provide) in Kansas City. This newest addition to Google's repertoire advertises connection speeds 100 times faster than current high speed broadbands, no data caps, high download speeds, wide selection of TV channels, and the newest hardware including the Nexus 7 tablet as a remote and a storage box with 2 terabytes of space for DVR'd shows and movies. With this service in the pipeline, Google has the potential of snagging business away from Comcast (CMCSA) and Verizon (VZ), adding another category of revenue. Currently, there is only one region where Google Fiber is offered, but as the infrastructure is gradually expanded, I am eager to see how this plays out not only for Google but Comcast as well. There is a significant barrier to entry for Internet and cable providers, but Google has the capital and the manpower to achieve this feat. In Q4, free cash flow totaled $3.65 billion, a deep pocket for investment. Google Fiber is a fiber-optics based network infrastructure that many other countries have integrated into their commercial and residential use, but due to the Comcast monopoly, there has been a lack of pressure for Comcast to invest in fiber-optics infrastructure. As a result, the monopoly has placed our nation at an information disadvantage in an information-driven generation.
Additionally, in May of 2012, CEO Larry Page announced that Google was going to acquire Motorola Mobility LLC, the company that pioneered the flip phone and has lately been producing smartphones and tablets using the Google Android Operating System. 7 months later, Google then entered another agreement with Arris Group, Inc. to dispose the Motorola Home business, the segment of Motorola Mobility that focuses on providing video entertainment services, for $2.35 billion in cash and stock. I suspect that one reason Google decided to sell Motorola Home is to reduce the high cost of revenue (in terms of percentage) of the Motorola Mobility division as this decision was surely not made for the purpose of raising capital. As of 2012, cost of revenue for Motorola Mobile accounted for 83.6% or $3.5 billion of Total Motorola revenues. As a percentage of total costs of revenue for 2012, Motorola Mobile accounted for 16.7% of the pie despite the disappointing data that Motorola Mobile Revenues only accounted for 8% of the total revenues for 2012. Thus in terms of efficiency, Motorola Mobile was not a very efficient division of the entire Google Company. The severance of the Home division demonstrates a priority of the company to optimize efficiency of the business. With the disposition of Motorola Home, I expect to see a bit higher operating margin for the next year and the additional cash generated could go into further expanding the Google Fiber infrastructure.
There is little doubt that Google will expand its operations and continue to develop into a larger company both in reach and market cap. Furthermore, Google will become more and more efficient as they seek to reduce costs and optimize profit. Before long, Google will be joining the $1,000 club as well, but before the company hits that milestone, I believe there will be a small-to-moderate pullback.
For almost 4 months, Google shares have been on a steady uptrend with minor fluctuations, but I expect there to be a correction in the charts before Google begins to make another trek up towards $1,000. Therefore, I say keep following Google and once Google bottoms out on the inescapable correction, buy in and hold.