Shares in focus: Google, king of the internet

published 27 January 2012

What is it?

Google is one of the world's largest internet technology companies. Its main business is to generate advertising revenue by making it easier for people to access information on the internet. Its business is centred around the Google search engine, advertising technologies, the Android and Chrome operating systems and applications such as GMail, documents and maps.

What is its history?

Larry Page and Sergey Brin met at Stanford University in the mid-1990s and developed BackRub, an internet search engine. In 1997, the name was changed to Google and it soon developed a reputation as the web's best search engine. Since then the company has attempted to own the internet by developing a variety of tools that attract visitors and advertising revenue, including news, images, email, messaging, documents and photos.

In 2006, Google bought the video sharing website, YouTube, while in 2007 it launched Android, an operating system for mobile phones. In 2011, Google agreed to buy Motorola's mobile devices business for $12.5bn (mainly for its patents), with the aim of using it to develop and control Android. Google posted sales of $37.9bn in 2011.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Who runs it?

Larry Page has been chief executive since April 2011, having previously been president of products and CEO between 1998 and 2001. Given his large shareholding, his basic salary was a token $1 in 2010. Nikesh Arora is chief business officer, while former CEO, Eric Schmidt, is executive chairman.

How's trading?

Revenues for the three months to December 2011 rose by 25% to $10.58bn, with operating profits up 17.8% to $3.51bn as higher costs reduced margins. However, a higher tax rate and an increase in the number of shares in issue saw earnings per share (EPS) grow by just 5.2% to $8.22. Paid clicks the number of clicks on advertisements jumped by 34%, but the amount paid by advertisers per click fell by 8%. Free cash flow remained strong at $2.97bn, giving Google a year-end cash pile of $44.6bn.

What's the outlook?

Much depends on how Google copes with rising competition and changing consumer habits. It is aggressively promoting its social network, Google+, to counter the threat of Facebook in online advertising. Android is key as internet access via smart phones and tablet computers increases.

Google's acquisition of Motorola may signal its intent to sell its own phones and tablets, but it must avoid antagonising other big users of Android, such as Samsung and HTC. A shift from desktop to mobile advertising clicks could also dilute advertising revenues and threaten profits.

The analysts

Of the 41 analysts surveyed by Bloomberg, 33 say "buy" and eight "hold". There are no "sell" recommendations. The average price target is $711 21% above the current share price. Most bullish is Jeffries, with a $825 price target, while Goldman Sachs is most bearish with a $600 target.

The numbers

Stockmarket code: GOOG

Share price: $586

Market cap: $189.8bn

Net assets (Dec 2011): $46.2bn

Net cash (Dec 2011): $44.6bn

P/e (current year estimate): 13.9 times

Yield (prospective): N/A

Our view

While Google remains a dominant force, its high profit margins are attracting intense competition in a changing advertising environment. With these uncertainties, the shares are a cautious hold.

Director shareholding

Nikesh Arora sold $445,000 worth of shares in early January, while both Larry Page and Sergey Brin continue to sell down their stakes. Recent share activity can be seen in the chart above, with the main directors' shareholdings shown in the table below.

L Page: 26,543,598

S Brin: 26,131,180

E Schmidt: 9,129,053

N Arora: 1,592

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.