Google Could Break $670.25 By 2014

| About: Alphabet Inc. (GOOG)

by Darnell Brown

Google (NASDAQ:GOOG) is the largest internet information provider in the world. The company is based in Mountain View, California and trades at around $623 per share with a market cap of $197 billion.

For years, when I thought about Google, I considered it to be just a search engine company. We now know that it much more than that. Google's mission was "to organize the world's information and make it universally accessible and useful". Google has lived up to its mission by providing search engine services, social networking services, email services, YouTube, Google Chrome OS browser services and, of course, its Android mobile operating system.

Google has been a consistently fast growing business since its inception. Google's rapid earnings growth has driven the stock price, which is up by 525% since the initial public offering in August of 2004. Google has increased revenues and net income in each year since it became public. Since 2005, Google's revenues have increased by 517%, and its net income has increased by 592%. Despite its large size, Google continues to grow at a rapid pace. In 2011, Google increased revenues by 29% and net income by 14%.

In mid-April, Google reported first quarter earnings, which once again revealed considerable growth. The company had first quarter earnings per share of $8.75, which was a 59% increase from earnings per share of $5.51 in the first quarter of 2011. First quarter revenues were $10.6 billion, which was a 23% increase from revenues of $8.57 billion in the first quarter of 2011. First quarter net income was $2.9 billion, which was a 61% increase from net income of $1.8 billion in the first quarter of 2011.

Google derives almost all of its revenues by selling online advertising. Google's increased earnings have been driven by a rise in its paid advertising clicks, which increased by 39% in the first quarter. The primary reason for the rise in advertising clicks is because of the success of Google's Android mobile operating system. Google's Android system is an Open Source system, which means that the company does not actually make money off of it. Google is essentially giving the use of its Android system away for free to anyone that wants to use it. Google makes money by licensing the Google apps that come on most Android phones and other Android powered mobile computing devices. "Google is making money with every app sold through the Market."

In 2011, Android powered smartphones accounted for more sales than any other operating system. Smartphones with the Android operating system accounted for 56.1% of all smartphone sales. Samsung (OTC:SSNLF), which uses the Android operating system, was the largest producer of smartphones, and in 2011, it sold 38 million smartphones worldwide. To put Android's dominance into perspective, the second most popular operating system was Apple's (NASDAQ:AAPL) iOS system, which had a market share of 22.9%, followed by Nokia's (NYSE:NOK) Symbian operating system with a market share of 8.6%, and Research in Motion's (RIMM) Blackberry operating system with a market share of 6.9%.

Positives in Google's future

Smartphone sales were up by 61.3% in 2011, and it has been estimated that 700,000 new smartphones are activated every day. This benefits Google, whose Android operating system was on 56.1% of the smartphones that were sold in 2011.

Google has not only surpassed its competitors in the number of ad clicks, it has surpassed its competitors in the percentage (2.78) of ad clicks that are converted into purchases. "Google's reputation as a starting point for searching the web appears to be a main reason why Google Product Search scores high as a comparison search engine, coming in second to Amazon Product Ads in traffic but first in conversion rate."

In late February, Google won US approval to purchase Motorola Mobility (NYSE:MMI) for $12.5 billion. The purchase of Motorola Mobility will allow Google to compete with other smartphone manufacturers who use the Android operating system in the highly lucrative smartphone market. Google has made it clear that it will continue to be a licensee of the Android operating system despite the purchase of Motorola Mobility.

Negatives for Google

After reviewing the first quarter earnings statistics, investors might be concerned about the 12% decrease in the amount that Google was able to charge for ads. The falling ad rates were partially due to cheaper mobile phone advertising rates.

Worldwide sales of Mobile phones decreased by 2% in the first quarter of 2012. The reason for the decrease was because of a slowdown in demand from the Asia/Pacific region.


Google is far and away the most popular internet search engine. When there is a need to look up some bit of information, I and most other internet users click onto Google, before we even consider other internet portals such as Yahoo! (NASDAQ:YHOO) or AOL (NYSE:AOL). The high amount of clicks allows Google to match advertisers with viewers and makes it popular and lucrative with internet advertisers. Google also has the advantage of being the licensee for the Android mobile operating system. Mobile advertising is a relatively new market with a huge upside. Google is a key player in the mobile advertising market and will reap big benefits.

With regards to Google's stock, the valuations are relatively cheap (price to earnings ratio 18.8/price to book ratio 3.3) for a company with a three-year annual growth rate of 26%. In addition, Google's stock price has been steadily increasing, and strong potential exists for it to move even higher. If smartphone sales continue to grow as expected, I think Google could break its 52-week high of $670.25 by mid- to late-2013. I highly recommend buying Google now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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