Unlike biotech, where the name of the game seems to be finding optimism in every bit of news, quite the opposite seems to be true in established tech names. So while Google's (Nasdaq:GOOG) business continues to grow well and produce copious cash flow, attention seems to inevitably go to the relatively few problem areas or controversial bits of the story. That said, Google shares still look as though they are priced for fairly modest performance.

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Fiscal First Quarter Results Come in
Google posted solid results for the first quarter. While revenue was flat sequentially, it did climb 24% on an annual comparison. Website revenue was up nearly 24%, while network revenue was up 20%. Paid clicks climbed 39%, while cost per click was down a more-than-expected 12%.

By and large, margins came in pretty well. Gross margin did slip a bit, both on a non-GAAP (down about two points) and GAAP basis (down a bit more than a point). Operating income, on a GAAP basis, rose 48% and margins rose five points. On a non-GAAP basis, operating income was up more modestly and the margin actually contracted a bit.

SEE: Earnings: Quality Means Everything


Holding Steady in Search, Picking up Traction Elsewhere
Google continues to show remarkably consistent internet search share in the high 60's, while Microsoft (Nasdaq:MSFT) and Yahoo! (Nasdaq:YHOO) battle it out to be the distant #2. At the same time, the spread of Google Android-powered smartphones and tablets continues to build Google's mobile search business.

Google is also kinda-sorta seeing some progress with Google+. Although this social networking site is widely regarded as a failure and a poor alternative to Facebook, Google is boasting large increases in user numbers. Now, there are some issues with how Google counts Google+ users (it looks as though they're over-counting or at least being very generous with what counts as a "user") and a quick look suggests a lot less activity (at least in my circles). That said, this is not exactly a big drain on Google resources and could yet develop into something more worthwhile.

Controversies Aplenty
Google certainly has its issues and challenges. Apple (Nasdaq:AAPL) is getting more aggressive in positioning itself against Google and I do worry that the acquisition of Motorola is going to alienate Android users (though what's the alternative? Go with Microsoft's operating system?).

I do also wonder about the reinvestment and growth potential for the company. Sooner or later, these companies reach a ceiling and struggle to grow at least for some period of time (AOL and Yahoo! never really made it past this hurdle, and Microsoft still hasn't sold the Street on its ability to do so). On the other hand, Google has a great record of making large acquisitions work and has been very successful with a variety of new ventures over the years (gmail, Android, etc.).

Last and not least is the matter of the company's stock dividend/split. Google is creating a new class of stock with no voting rights that will have the impact of a two-for-one split in the market. Multiple share classes are an irritant to many investors, but haven't necessarily held back the respective companies that have employed them. Some are going to carp that this is just about the founders consolidating their power and control of the company and that's true. Then again, billionaires are not exactly famous for sharing - at least not while still engaged in day-to-day business activities.

SEE: Understanding Stock Splits


The Bottom Line
Arguably the biggest risk to Google today is multiple compression from investors who no longer believe that the company can maintain past rates of growth. Online advertising is still arguably under-penetrated and Google has additional targets like online payments and TV/on-demand media available.

While I'm always a little suspicious of value-priced tech stories, particularly "mature" stories, there looks to be value in these shares. So long as Google can approach double-digit compound free cash flow growth for the next decade, these shares are worth a serious look.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.



Tickers in this Article: GOOG, MSFT, YHOO, AAPL

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