The GOOG

Last week while South Africans were slowing things down in anticipation for the long weekend, Google released their results. We gave you the brief highlights from their release with the promise of a more detailed analysis this week.


For the first quarter of 2014 Google grew revenue by 19% (yoy) to $15.42 billion. The increased revenue though did not filter down to double digit earnings growth though, with EPS only growing by 1.7%. This was partly due to operating margins dropping to 32% from 34%, and then compounded by extra stock issued through Google's stock based compensation.
The revenue figure is broken down with 68% of revenue generated from Googles own site, 22% generated through partner sites and then 10% generated from other activities like their Play store for Android devices.


As an advertising company it is expected that they generate 90% of their revenue from adverts, but it is the other 10% that gets me excited. Google are turning themselves into a diversified tech company, which is what you want to be seeing. In the tech world market dominators can quickly become irrelevant and end up on their knees, Blackberry/Apple in the recent past for example (Apple only in computers), so you want to see a tech company positioning themselves in more than one area. This is what Google are doing with a number of strategic acquisitions and their "Google X Labs".


Google X labs is a facility where they work on semi-secret projects with the goal to "improve technologies by a factor of 10, and to develop science fiction-sounding solutions". Some of the products being worked on is the Google glasses, their driverless cars, a contact lens to tell diabetics when their sugar levels are low and then a balloon that can be used to bring internet to rural parts of the globe instead of using satellites. Some very exciting projects!


Some of the more recent acquisitions have been Nest, which designs smart tech. It is still a small company but one of its founders was one of the main Apple designers under Jobs which means whatever is designed will have the tech from Google and the design from a master. Another company that they bought is a company called Deep Mind which is an Artificial Intelligence (AI) company. They are trying to teach computers to learn, which then should lead to them "thinking" for themselves.

The implications for search are that you will get a more intuitive response from Google when you are searching, instead of irrelevant information when you have a complex search. The one experiment that they did at Deep Mind was to show a computer Youtube videos of cats, and then when they were done they asked it to draw a cat. The computer came back with a very generic looking cat, very basic but the biggest part of learning is associating words with concepts.


Any one of these projects in the future has the potential to be a major revenue contributor and become core to our lives like Google search is to our lives today. For a tech company this is what you want to see and why I think that Google will remain relevant as a company for the foreseeable future.


Now back to the 90% part of their revenue. Their Cost Per Click (CPC), which is the money that Google gets for every click on an advert was down 9% and is the 9th straight quarter of negative growth. The reason for the dropping average CPC is due to the shift to mobile, advertisers are not willing to pay as much yet for a click on a mobile advertisement. Due to the shift toward mobile, Google's paid clicks are up 26%, which more than offsets the lower average price that they get for every click. As our mobile phones get more powerful and functional, the value of a mobile advert should converge with the value of an advert on other devices.


Only one-third of the world's population has access to the internet! As more and more people move onto the internet and as more and more people feel safe doing online purchases, so will Google list of willing advertisers grow. Google is in the position where they are a very long way off being a mature company and as such should see continued growth going forward.


Their current P/E is sitting at around 30, which is to be expected for a company with their growth potential. Interestingly in 2004 when their share price was $190, they had a PE in the mid 90s, sometimes companies have high PE's for a reason. Google is an exciting company with a growing customer base and as such they are one of my favourite US stocks!