Technical Analysis by Rajiv Singh
Google Quarterly Profit Surge as Ads Revenue Continues to Grow
On Friday, October 18, 2013, Google Inc. (NASDAQ: GOOG) surpassed the $1,000 benchmark for the first time; the company’s stock surged 13.80%, to close at $1,011.41 on the NASDAQ. The world’s largest internet search-engine company, with a market capitalisation of $334 billion, has now become the third most valuable U.S. company, behind Apple Inc. (NASDAQ: AAPL) and Exxon Mobile Corp. (NYSE: XOM). Moreover, Google Inc. has also joined elite companies like Seaboard.com and Priceline.com, with a stock price in excess of $1,000. Shares in Google Inc. which were selling at $85 during its IPO back in August 2004, have yielded substantial profits to investors every year, except in 2008 and 2010 when its prices slumped due to the recession. At the closing bell on Wednesday, October 23, 2013, Google’s stock continued to its climb as it ended the trading session at $1,031.41, up 2.42%.
Q3 Profits Boosted by Internet Marketing
Google Inc. reported a profit of $3 billion for the third quarter of 2013, up 36% from the previous year, exceeding estimates, mainly on account of increased volume of paying ads which have surged 26%, the highest percentage so far this year. Google is capitalizing on the increasing sales of Smartphone’s and tablets, and the company is trying to put more ads to boost Ad campaigns like pay per click. Google’s Chief Executive Officer, Mr. Page, vindicated that mobile ads provide benefits to advertisers, prompting potential consumers to visit or call retailers leading to actual sales. He told analysts that more than 40 million calls are driven by Google ads, a twofold surge as compared to last year.
Google’s reported $14.89 billion of gross revenue as of Q32013, as compared to $14.10 billion Q32012. Though company has improved on overall revenue, net profit margin has declined from 22.89% as of Q22013 to 19.94% as of Q32013 on account of higher depreciation and amortization cost.
Google Inc.’s revenue increased by 12% for the quarter ended September 30, 2013, in comparison to the Q3 2012, but the Average cost-per-click has declined 8% over the Q3 2012 and 4% over the Q3 2013. The decline in cost-per-click is partially because of factors like Google’s business diversification in emerging markets, slowdown in PC markets and channel mix.
Google-owned sites revenues grew by 22% Y/Y, whereas Google’s partner sites revenues grew by 23% Y/Y. Winner among segments were Other revenues which grew by 85 % to $1.23 billion, or 9% of total Google segment revenues, in the third quarter of 2013 as compared to $666 million, or 6% same quarter last year.
Motorola Losses – A Drag to Google
Losses from the 12.4 billion Google-Motorola deal has been a drag for Google Inc, the company reported Motorola Mobile segment operating loss of $248 million in the Q32013, 29% higher as compares to loss of $192 million in the Q32012. Motorola Mobile segment revenues were $1.18 billion, or 8% of consolidated revenues in the Q32013, compared to $1.78 billion, or 13% of consolidated revenues in the Q32012. During the earnings call while replying to Motorola losses, CFO Patrick Pichette reiterated this is still “early days” for Motorola, yet Google was encouraged by the response to the Moto X and “Now they’re working to build out marketing and distribution”.
In the Pipeline
Facebook Exchange: As a strategic move and to explore other advertising avenues, Google is also planning to work with rivals like Facebook in a bid to get more companies to buy ads. The new feature called ‘Facebook Exchange’ will be available to Google clients in the next few months and this will enable marketers to target Facebook users based on their browsing history. As per an estimate from eMarketer, a leading research firm in digital marketing, media and commerce, Facebook Exchanges contribution in Facebook’s advertising revenue worldwide is likely to grow from 5% in 2013 to approximately 21% in 2018.
Google Glass: A wearable computer glass, developed by Google X Lab, with an objective to provide information in a Smartphone-like hands-free format. It can be worn as a typical eyewear, but the Google Glass will include a video display, a front facing camera and a microphone to facilitate a normal telephonic conversation. Google Glass will use 4G technology, and will respond to the user’s voice command and display content on the video screen. This innovative product is projected to be commercially available in 2014. As per a projection from Business Insider, Google glass sales are likely to grow to 21.15 million units by end of 2018.
Google Fiber:The launch of Google Fiber in July 2012, a new generation Internet technology has further strengthened the position of Google as a global leader in the Internet domain. The Google Fiber service provides internet speed which is 100 times faster than the normal broadband and also offers other highly appealing features like internet speed of 1 Gigabyte per second, Instant Download/Data Sharing, and crystal clear HD TV-viewing. The Google Fiber service, though currently available in Kansas City, Kansas and the Kansas City, Missouri will be rolled out to the other cities of U.S. in the near future. Google Fiber with its unparallel features and offerings will make it even harder for its peers to challenge Google’s dominance in the Internet domain.
Google Driveless Car:Google Driveless car, as the name suggests, is a chauffeur-less car. Google team led by Sebastian Thrun (co-inventor of Google’s Street View) has been working on this project since 2010 and made very significant improvement. The car has a rotating sensor known as LIDAR (laser radar) fitted a rooftop of car which analyses the 3D image of its surrounding. So far Nevada, Florida and California are the only states which have approved Testing of driverless cars on public roads. Larry Page, CEO Google mentioned in Q3 2013 earnings call that “I think we made tremendous progress and we’ve driven large amounts of miles”, nonetheless he also stated that “it’s still ways from being a commercial product”.
WSA on Google
WSA strongly believes that Google will outperform the industry, given the substantial revenue growth in the mobile ads market and its ability of product innovation. Google is already the market leader in its segment with over 43% market share. Unlike competitors such as Yahoo, Microsoft, AOL and Facebook, Google generates its revenues from diverse sources which include Search Engine, Digital Video Content, Email and mobile advertising.
Google’s EPS has increased by 34% Y/Y in Q3. The company’s stock has surged 14.85% in the last five trading sessions to cross $1000 mark and yet the stock does not look overvalued at a P/E of 26.84. As per the discounted cash flow method of stock valuation, the stock is valued at $1,100 per share. This indicates that the stock still has the potential for an upward price movement in the medium to long term. In the long-run, we recommend Google as a buy given its strong position in the market across segments, managerial efficiency, robust earnings history, and positive industry outlook.
Google is trading above its 20-days, 50-day and 200-day simple moving averages, indicating a bullish trend whereas Momentum oscillators like MACD gives a sell signal. RSI above 70 and William %R indicates an overbought territory for the stock. The Marubozu candlestick formation indicates the buyers are controlling the market. Overall most of the technical indicator too gives a buy signal on the stock.