Despite previously bearish sentiment weighing on its stock, Google (GOOG: Charts, News, Offers) trounced all expectations when it announced its Q3 earnings – a 32% rise in adjusted net income to $2.17 billion, or $6.72 per share, with net revenue of $7.29 billion year-over-year, a 23% increase over the previous quarter. Wall Street had been expecting an EPS of $6.67 a share, with net revenue of $5.2 billion. Its net revenue was up to $5.48 billion, from $4.38 billion a year ago. It turns out the concerns over its weak guidance last quarter, due to a massive shopping spree that diluted its profits, was far overblown, despite headline grabbing troubles with an eroding market share in China and privacy issues worldwide. The company hired an additional 1,500 employees in one quarter, a clear sign that its growth engine is returning, and as of the end of Q3, the company had $33.4 billion in cash or cash equivalents. The stock jumped nearly 10% after its earnings announcement and has been on a bull run ever since. With analysts’ pegging new price targets in the mid $700s, is it time to jump aboard the Google bandwagon?
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Google’s well-known core business consists of search and advertising. Its main revenue comes from online advertising; businesses use its AdWords program to promote products via targeted advertising, and it provides the universally usable AdSense to companies and individuals alike to gain shared revenue through targeted advertising. In the past few years the company has been on an acquisition spree – most of its purchases, such as Youtube, Picasa, Android, ReCAPTCHA, Aardvark, Slide and Angstro, have been aimed at bolstering its position in the cloud computing market. However, the company has caught a lot of bad press due to seemingly bizarre investments, including (but not limited to) windmills, solar mirrors, low-income housing credit, a human powered capsule monorail, fiber optic networks across the United States, genetics testing, space travel, a half-billion investment in Clearwire and most recently self-driving robot cars. These stranger investments have provided bloggers across the web with endless fodder for speculation. Some believe Google’s slowly laying out the foundations for its envisioned future of smart homes and an omnipresent computing cloud controlling most aspects of life, while other simply believe that Google’s chaotic approach is an all-or-nothing grasp at straws in order to diversify from its core competencies.
While many criticize Google’s undisciplined use of its cash resources, recent news regarding how the company utilized tax loopholes to save $3.1 billion in the past three years paints a different picture – one of a shrewd, calculating company with carefully researched methods of cutting costs. The company has controversially shifted its foreign profits between Ireland, the Netherlands and Bermuda, in a technique known to lawyers as the “Double Irish” or “Dutch Sandwich,” which reduced its overseas tax rate to 2.4%, far lower than its main tech rivals.
There is no question that Google has, through its search engine, mobile operating system Android and the indispensable suite of Google Apps, changed the forward frontier of the Internet. It was inevitable that many of its tools, such as Google Maps’ controversial Street View feature and its attempt to gather information from unsecured wireless networks have raised privacy red flags across the globe. The growth of the company has also made it a frequent target for antitrust litigation, especially from its primary search rivals, Yahoo (YHOO: Charts, News, Offers) and Microsoft (MSFT: Charts, News, Offers). This is the reason behind Google’s 11% increase in lobbying costs the previous quarter, up to $1.2 million from $1.08 million a year ago. Google is well connected in Washington, and has been reported attempting to influence online advertising regulation, privacy issues, patent reform, online consumer protection, cloud computing, renewable energy and even Congressional Internet service usage rules and broadband access. That’s quite a lot of pools to dip into for the company whose well-known good guy mantra is “Don’t be evil.” The company also raised eyebrows with a simultaneous investment with the CIA in Recorded Future, an all-encompassing web spider that simultaneously reads news and social feeds with an algorithm that attempts to predict future events and trends, much like the older and less sophisticated Web Bot project.
In the end, investors are concerned if Google can maintain its growth despite bottlenecks appearing worldwide. CEO Eric Schmidt said of the 3Q results, “Google had an excellent quarter. Our core business grew very well, and our newer businesses — particularly display and mobile — continued to show significant momentum.” Going forward, Google has several exciting products on the horizon, with Google TV, created in association with Intel and Sony, topping the list. If this web to TV marriage venture succeeds where others have failed, Google will have opened a whole new door to untapped revenue through digital television advertising. However, this will likely cause the company to run straight into a roadblock of opposition from major networks whose core revenue is fueled by commercials. Its upcoming Chrome OS is designed to tie its cloud apps together, and become a major threat to Microsoft’s core business. Android or Chrome powered tablets, vehicles and appliances are also highly anticipated, and with the expansive reach of its freely distributed OS, Google will funnel even more hits through search and thus gain more revenue from advertisers.
Other News About GOOG
ABC, CBS, NBC Blocking Programs From Google TV – The inevitable roadblock begins.
See more: (GOOG: Charts, News, Offers), (CBS: Charts, News, Offers)
Microsoft thumbs nose at Google with beta of ‘Office 365′ – The battle royale over cloud supremacy starts between two tech titans.
See more: (GOOG: Charts, News, Offers), (MSFT: Charts, News, Offers)
Other Stocks in the News
HP Slate 500 shows how far the enterprise tablet has come
See more: (HPQ: Charts, News, Offers)
Baidu: Piper Upgrades After Strong Q3 Earnings; Boosts Target
See more: (BIDU: Charts, News, Offers)
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
Google will continue to dominate in the future as the smart phone market grows and they expand into more markets. And online advertising will only continue to grow.