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This
Company has 529
Billion Potential Sales a Year |
Published:
April 14, 2008
Who
out there hasn't heard of Google (Nasdaq: GOOG, $457.45)? The very phrase "Google it" has
literally become synonymous with Internet keyword search. Just
as Microsoft has dominated the desktop, Google has become a
gatekeeper for the Internet and is beginning to assume control
over the web.
The
company has steadily accumulated market share over the past
few years and continues to pick up steam. In early 2006,
Google was feeding back results to nearly 90 million
domestic Internet searches per day. And as San Francisco
Chronicle reporter Ellen Lee pointed out, "that creates
about 90 million opportunities for Google to make money."
At the top of those search results are paid advertisements,
or "sponsored links." And every time a user clicks on one of
them, the advertiser
behind
it hands over cash to Google -- anywhere from a penny to $100,
depending on the circumstances. Furthermore, by teaming up with
cooperative third-party outfits like AOL and CNN, Google has
literally blanketed the Internet with ads. According to ComScore,
the firm's partner sites (which host Google ads for a share of
the profits) are visited by nearly three out of every four
Internet users in the country.
Just a few years ago, Google handled less than 40% of all online
searches globally. But today that percentage now tops 62% --
meaning the company processes roughly two-thirds of the 70
billion or so Internet queries that are filed worldwide every
month. By comparison, runners-up Yahoo! (Nasdaq: YHOO) and
Microsoft, which are in merger talks, control just 15% combined
-- and smaller rivals like Ask.com are left to fight over the
crumbs.
The paid search business is the fastest-growing component of the
online advertising industry, accounting for roughly half of all
revenues. And as companies continue to ramp up their Internet ad
budgets, some estimates put the overall market in excess of $50
billion within the next three years.
Clearly, Google has a near-unassailable position and enjoys the
wide economic moat that comes inherently with an expanding
network -- more users attract more advertisers. And all of this
says nothing about the firm's potential to monetize other
ventures, such as the $1.6 billion acquisition of YouTube, the
undisputed king of online video -- where tens of millions of
users congregate every month to watch video clips.
Of course, all of this success can be seen in the firm's
financial statements. According to Morningstar, revenues have
exploded at the rate of +140% annually since 2001, topping $16
billion last year. More importantly, a highly scaleable business
model has leveraged that revenue growth into a mountain of
operating cash flows -- nearly $6 billion over the past year
alone.
And just as Microsoft is famed for creating a bevy of
millionaire investors, Google is now doing the same for its
owners. In fact, a recent New York Times article
estimated that there are over 1,000 Google shareholders each
holding more than $5 million in the stock.
Yet, despite a triple-digit stock price, don't let the price tag
fool you -- the shares are not as expensive as you might think.
The stock
is now trading at just 19 times next year's $25 per share
earnings estimate. That's more than reasonable for a
high-caliber company projected to grow +30% annually over the
next five years and one of the most affordable levels Google
shares have ever reached.
Part of the pullback can be attributed to fears that a slowing
economy will result in fewer online advertising dollars. But
Google will be little impacted because sponsors are only paying
for ads that result in clicks (and leads) -- paid search is the
last place they'll cut back.
Nevertheless, with back-to-back monthly reports showing soft
year-over-year paid click volume from U.S. internet users, a few
question marks have popped up. Fortunately, this appears to be
more of a growing pain than a serious malady and quite possibly
is the result of Google's efforts to crack down on fraudulent
clicks.
And flat click-through growth doesn't necessarily mean flat
revenues. If (as many suspect), this is the result of Google's
efforts to feed hotter leads to advertisers, they will end up
paying GOOG more per click. In the meantime, the company is
still gaining market share, stealing nearly two percentage
points last month from Yahoo! and Microsoft.
Those that have always admired Google's success but considered
the shares sharply overpriced now have a window of opportunity.
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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