Internet search and advertising giant Google (Nasdaq:GOOG) saw its share price jump forward after reporting impressive sales growth during its second quarter. Profits increased by a smaller margin, as Google is spending heavily to stay ahead of rivals. Its long-term ability to maintain dominance in online advertising and extend this to other venues is highly uncertain, but the stock is cheap if current growth trends persist over the next few years.

TUTORIAL: Economic Indicators

Second Quarter Recap
Revenue advanced 32.3% to $9 billion. Google website revenue made up the bulk of total revenue at 69%, and improved 39%. The next-largest revenue source stems from member websites, or third parties that use Google's AdSense program, in which Google shares ad revenue with these parties. Revenue rose 20% to make up 28% of the total top line in this area. The revenue that Google shares with these third parties is called "traffic acquisition costs", and reached $2.1 billion during the quarter. Other revenue grew 20.2% and accounted for less than 4% of revenue, as it consists of Google's mobile phone business that has yet to generate any significant advertising revenue for the firm.

Total costs increased as well, rising 37.9% to $6.1 billion as Google is spending heavily to maintain its advertising lead on archrivals, including Yahoo! (Nasdaq:YHOO) and Facebook, and smaller rivals such as AOL (NYSE:AOL) and IAC/InterActiveCorp (Nasdaq:IACI). For instance, it recently launched Google+ to compete with Facebook, and boasted that 10 million users had signed up since it was launched. As a result of this spending, operating income rose 22% to $3.1 billion, though this still represented a very healthy operating margin of almost 32% of sales. Net income also rose 36% to $2.5 billion.

For the full year, analysts project sales growth of 26% and total sales of $27.7 billion. The current consensus earnings projection is $33.82, or year-over-year growth of approximately 28%.

The Bottom Line
Google's basic strategy is to develop website content for little to no cost to consumers, and make money from advertising. The company is also working to develop dominance on mobile phone applications, television sets that include working with Sony (NYSE:SNE) to integrate software and hardware, and replicate the success it has experienced on the internet. Google's estimated market share of the online search services is approximately 65%.

At a forward P/E of about 17.7, a fair amount of growth is already discounted in the share price valuation. There is also little assurance that Google will continue to dominate online search and advertising. Just a few years ago, AOL and Yahoo! held sizable leads on the competition, but were quickly outgunned by Google. With 20-30% sales and profit growth over the next five years, the stock is cheap, but these are pretty ambitious growth targets, given that the technology sector evolves extremely rapidly, and frequently turns today's winners into has-beens. (Find out how the PPI can be used to gauge the overall health of the economy. Check out Predict Inflation With The Producer Price Index.)

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!