By Roger Choudhury, Lead Editor
An improving global economy, penetration into new markets, and expansion into other markets are all factors that provide robust and sustained growth in the online advertising revenues for Google (NASDAQ:GOOG). Moreover, according to S&P, U.S. online advertising revenues increased by 3% in 2009, and 15% in 2010, and forecasts are for growth of 10% in 2011. S&P believes that the U.S. accounts for a third of the online advertising market. Google is also seeking to cast a wide net in the mobile Internet arena, which provides another driver of growth as more Internet-ready phones come into use. A catalyst pointed out by Credit Suisse is that non-GAAP EBIT margins as a percent of net revenues can stabilize at pre-recession levels of around 50% in 2012 and beyond. This provides an added source of EPS growth.
Google also can take advantage of Yahoo’s (NASDAQ:YHOO) adverse revenue situation. In Q1 2010, revenues ex-traffic acquisition costs (TAC) dropped by 6% to $1.064 B. For Q2 2011, Yahoo expects revenues ex-TAC to be in the range of $1.075 B to $1.125 B. In Q1 2010, that actual figure was $1.13 B. In 2010, revenues ex-TAC fell by 2.01% to $4.588 B. For 2011, the Street expects revenues ex-TAC to increase slightly to $4.7 B (+2.44%). According to comScore (NASDAQ:SCOR), Yahoo has only 15.9% of the U.S. search market compared with Google’s 65.4%
The next largest competitor is Bing, which currently owns 14.1% of the U.S. search market. However, Microsoft (NASDAQ:MSFT) announced that its Bing search engine will leverage the relationship with Facebook to take “social search” to new heights. Bing will now not only reveal the pages that your Facebook friends like, it will show the same for other Facebook users in an anonymous manner. Now, Facebook users can “like” the results of Bing’s travel search function, and have updates on new deals posted to one’s Facebook feed. Combine this partnership with Facebook’s moves to damage Google in the media, this definitely heats up competition. Microsoft owns a 1.6% stake in Facebook.
Google has a similar tie up with Twitter. Subscribers to Google’s Social Circles product can view the results of Twitter data to see what their friends have shared. Yet, whereas Bing takes existing “likes” from Facebook friends and strangers, Google search requires that one “like” the site from the search results page, hence the name “Google +1.” We think that Google can easily correct this flaw or adjust it, and compete effectively with Bing-Facebook. Anyway, Microsoft and Facebook announced their partnership 7 months ago, and have little to show for it.
Google reported Q1 2011, results on April 15, when non-GAAP EPS came in at $8.08 (+19.52% over Q1 2010), which was below the consensus estimate of $8.11. Revenues also came in at $8.575 B (+26.56%). Traffic acquisition costs as a percentage of advertising revenues have also been trending downward since Q2 2009. For Q1 2011, that statistic was 24.5% in comparison to 26.4% in Q1 2010.
For 2011, analysts estimate GOOG will earn $33.68 in non-GAAP EPS (+28.01%) with revenues of $28.1 B (-4.14%). Projecting forward into 2012, the Street anticipates non-GAAP EPS to be $39.45 (+17.13%) with revenues of $33.4 B (+18.86%). 96% of the company’s revenues came from advertising in 2010, and 97% in 2008, and 2009. In 2010, revenues jumped by 23.9% to $29.32 B, net income went up by 30.4% to $8.5 B, and GAAP EPS grew by 28.9% to $26.31. The EBT margin was fat at 36.82%.
With a GAAP EPS of $25.75 for the trailing 12 months, P/E is currently 20.5. Given declining revenues in 2011, we believe that a forward 2011 P/E of 15.7 is fair. Consider, though, that the 2010 P/E was 22.6 with 28.9% growth in GAAP EPS and 23.9% growth in revenues. So, growth in the upper teens in both non-GAAP EPS and revenues should be rewarded with a P/E north of 17.5. Yet, the forward 2012 P/E is only 13.4. This is why we believe that Google should be a $700 stock by the end of 2012, implying a P/E of 17.7. GOOG -currently trades below $530 per share, and you are looking at a return of over 30% in 20 to 24 months. This is a buy at current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.