Business of Google
Google is in the business of online search. The company maintains a website
which is one of the most visited websites in the world. Google has indexed more
than 8 billion web pages on the web and is the most popular search engine on
the web today. Anyone with an Internet connection can use the website to look
for information that s/he needs. Google has become one of the most recognized
brands of today because of its vastly popular search engine. The google interface
is available in more than 100 languages to users worldwide. The company generates
revenue through the advertising programs. The advertising program consists of
advertisers advertising with google and then google uses its search technology
selecting which web page should host the ad. Every time someone clicks the ad
revenue is shared between google and the publisher of page where the ad is being
hosted.
Google Search appliance is another source through which google generates its
revenues. The search appliance is a hardware and software solution that companies
can use to implement google search technology to their internal and external
information.
To support these programs google maintains 25 sales offices in 14 countries
and specialized sales teams are deployed in 13 vertical markets. Apart from
providing support to existing users there exists direct sales teams. These teams
target advertisers with large advertising budgets and are more in a role of
relationship building than one off sales.
Competition
Google faces intense competition for its primary search business and Microsoft
and Yahoo! are its two main competitors.
The groups in which the company competes can be classified in three main groups
-
- Users for the search engines.
- Advertisers who register for the AdWords program.
- Web sites to attract and retain websites to become member of the google
network.
Financials
Google has shown tremendous growth in revenues and profits and still continues
to go strong in the quarters in fiscal 2005 as well. The company has grown from
revenues of $19.1 million in 2000 to revenues of $3.18 billion for the year ended
2004. In the same period the company has turned around from a loss of $14.6
million in 2000 to a profit of $399 millions in the year ended 31 December 2004.
The diluted EPS for the company has been $1.46 in the fiscal ended 2004.
Advertising revenues (discussed earlier) made for 94%, 97% and 99% of the total
revenues of the company in the year 2002, 2003 and 2004. The balance of the
revenues is derived from licensing of the web search technology, license of
search solutions to enterprises and the sale and license of other products and
services.
As is clear from the above figures that google derives most of its revenues
from advertising. There are two forms of advertising. One in when a user goes
to the google website and searches for something, the result page would invariably
have certain ads. This is called advertising on Google website. The second type
of advertising is the text and image ads that one sees on various web pages.
The revenue that google makes on such ads is called Google Network websites.
Now since the revenue on Google Network Websites is shared with the website
publisher as well; the operating margins are lower on Google Network
websites than on Google websites.
Because of this reason the Operating Margins of the company is going to shrink
going forward. This will further be clear if one understands that the percentage
of revenues from Google Network websites as a percentage of total revenue is
increasing. While it was just 25% in 2002, it grew to 44% in 2003 and 49% in
2004. The operating margins are going to go down going forward.
However the revenue growth going forward is expected to be pretty robust and
so there should be a substantial absolute increase in earnings even though the
margins may decline.
One point to note is that it is a stated policy that the company shall not pay
any dividends on its shares.
Conclusion
Google is a good company, which is fundamentally strong and has got tremendous
expertise in its area of operation and has shown strong growth as well. However
a company like any other asset has got a fair value and google seems to be at
its fair value and may even be called a little overvalued. The diluted EPS for
the latest 12 months (ending June 2005) is 3.41 and to that extent the P/E multiple
multiple
of the company is around 88, which is very high even for a fast growing company.
So while fundamentally the company is good investors may remain wary of purchasing
it at current prices as that is too high a price to pay for this company. Investors
should look for dips in the prices to get in the stock.
The table below lists other stocks in this section
which also belong to the I.T. Sector.
I.T.
