Few will question Google's (GOOG) success, the strength of its business model, or its dominance in key technology markets. What analysts continue to debate about this technology company is whether, like Apple (AAPL), it is due for a decline in stock value after a significant run-up over the last several months, or if it still offers growth potential for investors.
While Apple shares have fallen in value by 29% since mid-July to around $425, Google stock has jumped 46%, now trading at around $830.
Buying Google at just the right time has made many people wealthy. Nine years ago, if you bought it at $95 a share and held it until now, you would be sitting on a 773% profit. Or if you bought the stock in November 2008 when it plummeted from its January price of $692 down to $247, your profit would be 236%. In June 2012, you could have purchased it for as low as $556.
Now the big question for Google investors: Has the stock run its course or could it climb all the way to $1,000 a share as some analysts think it can?
Strong Revenue and Earnings Growth
During its latest quarterly earnings release, Google reported revenues of $14.42 billion for the fourth quarter, up 36% from the previous year. Quarterly net income climbed from $2.71 billion in 2011 to $2.89 billion in 2012, a 6.6% increase.
Analysts project revenue increases of 14.9% this year and 14.5% next year. They also estimate earnings will rise 14.8% this year, 17.5% next year and continue to increase annually by more than 14% a year for the next five years.
The company has an A++ financial strength rating and the stock is rated A- by TheStreet. Of the 38 analysts following Google, 10 have strong buy ratings and 19 have buy ratings, with the remaining 9 rating it as a hold.
Gene Munster, a tech analyst for Piper Jaffray, summed up analyst sentiment when he wrote: "Looking at the consumer technology world over the next 10 to 20 years, we believe Google is far and away the best-positioned company."
Institutional investors have been bullish on the stock as of late. Google in early March reportedly passed its tech rival Apple as the most-owned stock by the 50 largest actively managed U.S. mutual funds. It also recently became the most-owned company among hedge funds.
More Competition = Lower Margins
The case against Google climbing much higher rests mostly on increased competition. Because of its diversity in the technology space, it has many competitors to fend off, the aforementioned Apple being among the tops. With increased competition typically comes lower margins. Part of Google's appeal is its gross margin of nearly 59% and operating margin of 25%. It would be difficult for Google to increase those already stellar margins, and increased competition will most likely have the opposite effect.
Google also appears overvalued when compared with many of its competitors. It has a current price-to-earnings ratio of 25.8, much higher than Yahoo's (NASDAQ:YHOO) 7, Apple's 9.79, or even the 18.76 sported by Baidu Inc. (NASDAQ:BIDU), often referred to as the "Google of China."
But one of Google's strengths that could offset competition is its ability and willingness to innovate. Nearly 37% of its 53,000 employees are based in research and development, and the company has more than doubled its R&D spending in the last four years to just under $7 billion last year.
Out of this research, Google has plans to launch Google Glass, special eyewear that can provide its users search-engine type information on places they are looking at through the glasses instantly. It has plans to start its own streaming music service to compete with Pandora and others. There are also reports of Google retail stores. And Google is also reportedly working on development of a self-driving car.
In the search engine market, Google commands 67% market share. Much like Kleenex and Jell-O, its brand name has become synonymous with the product it provides. When people go to look up information on the Internet, they refer to as "Googling" the information.
While the search engine continues to be its core business, Google has successfully expanded to other avenues. Its Android operating system dominates the growing smartphone market, with nearly 70% share. Google Shopping is hoping to compete in Amazon's (NASDAQ:AMZN) space. Google Plus wants a piece of Facebook's (NASDAQ:FB) market in social media. Google also now sells laptop computers, saturating the airwaves with ads for its $249 Chromebook and its recently introduced high-end Chromebook Pixel.
Google is also earning large amounts of revenue from YouTube, which it bought in 2006. Google says that viewers are consuming 4 billion hours of videos a month. Advertisers are taking notice, increasing their spend by 50% from 2011 to 2012.
Because of its dominance in these areas, Google has become one of the most utilized advertising mediums. In 2012, $43.5 billion of its $46 billion in revenues came from advertising, growing in excess of 20% in each of the last three years.
Solid Balance Sheet
Google has a solid balance sheet. At the end of last year, the company had nearly $15 billion in cash, up from $10 billion the year before. Its total asset base has tripled in the last four years to $33.3 billion. Google's liquidity is solid, with a quick ratio of 4. That means if the company had to pay off all of its liabilities at once, it would only have to use a quarter of its liquid assets to do so.
Google is already proving more resourceful than its competitors in other key measures. Its average annual sales growth over the last five years is 23.5%, compared with the industry average of 19.83%. It also boasts superior net profit margins over the last five years at 24.4%, compared to the industry average of 18.4%. Google has also earned better average returns on its assets (13.4%) and investments (16.1%) than the industry average (9.8% and 12.1%, respectively).
Google certainly has the asset base with which to continue its amazing growth and build strong positions in new markets. However, to continue its current run, its future stock growth likely has an uphill battle, as investor expectations continue to grow and competitors continue to improve - these factors could ultimately lead to Google's downfall - just look at Apple.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was written by an analyst at Catalyst Investments.