Google Inc (NASDAQ:GOOG) is one of the most successful Internet companies that ever existed, and has earned a $226B valuation. Google enjoys an overriding market share in search and is present in many other markets. Google Inc (NASDAQ:GOOG)’s unimpressive fourth quarter can be attributed to a number of reasons, like algorithmic preferences for product listing Ads over more expensive AdWord clicks, aided by prominent placement of PLA above AdWord links, the advent of specialized and advanced applications that facilitate eCommerce and travel transactions without Google acting as an intermediary. The impact of Hurricane Sandy also can be counted but not strongly. Mobile users will be the center of all the strategies evolved by Google to grow and sustain its domination in the Mobile search segment. The search giant is very well aware of this, as they have aggressively moved into several markets that are not necessarily core to their search business.
Financials-Missed Expectations but Balance Sheet Still Strong
Google missed the market expectations regarding its third quarter earnings. Net revenue growth was 17.9% sequentially. GAAP Net Income was $2.18 billion in the third quarter of 2012, compared to $2.73 billion in the third quarter of 2011. Earning per share (Non GAAP) in the third quarter were $9.03 compared to $9.72 in the third quarter of 2011.
Motorola Mobility Holdings Inc (NYSE:MMI) Unit, which Google acquired, was the core reason behind company missing the expectations. Motorola’s mobile business generated only $1.78 billion of revenue. Its home business generated $797 million of revenue. Google’s core business delivered $11.4 billion. The miss in Google’s core business came from an unexpectedly rapid drop in price-per-click. The growth of paid clicks was in line with expectation (+33%), but per click pricing dropped faster than expected (-15%).
Despite less than expected third quarter earnings, Google maintains a strong balance sheet, with a debt/equity ratio of only 0.11. The current ratio is nearly 4, and the company has more than $44B in cash. Clearly the company is in no economic peril anytime soon, and has plenty of financial support to keep acquiring startups and other companies, to help expand its business. Google has acquired more than 100 companies in 14 years and doesn’t appear to be slowing down.
Tough Competition Ahead
While two years back only Bing and Yahoo! Inc. (NASDAQ:YHOO) were seen as potential competitors to the Search engine giant, now Yahoo, Apple Inc. (NASDAQ:AAPL), and Amazon.com, Inc. (NASDAQ:AMZN) are giving tough competition. As per a survey published by New York Times of the two consultancies:-
Forrestor research found that one third of online users started their product searches on Amazon.com, Inc. (NASDAQ:AMZN) compared to 13% who started their search on a traditional search site. COMSCORE, Inc. (NASDAQ:SCOR) stated that product searches on Amazon have grown 73% in the last year, while shopping searches on Google have been flat.
Amazon is not the only site which has proved to be a sturdy competitor. Apple’s Siri can also provide wide functions and is capable of giving Google a tough time. Facebook Inc (NASDAQ:FB) is also not lagging behind and is uniquely positioned to answer a lot of questions people want to know.
The data from Comscore reveal that the desktop search is -2.5%, but the eCommerce data shows the strong growth of 16% in October. Besides, there have been many shopping specific apps, like RedLaser(eBay), Amazon Price Scan, RetailMeNot, and Kayak in travel, which appear to have acquired market share in commercial search volume.
Mobile Foray
The acquisition of the money-losing Motorola Mobility was expensive, but it could be justified considering that it is trying to establish itself as a leader in the world of mobile devices in order to grow its ecosystem of products and services. This takeover proves Google understands that desktop computing is slowly taking a backseat, while the mobile computing will be the future. Google expects that its ecosystem will challenge Apple in the coming years, and is making the investments necessary now in order to garner the profit.
Google inked a deal with mobile carrier billing company Bango to bring carrier billing to Google Play, beginning in Australia. The deal could help boost conversions and revenue for Android developers. Despite its greater market share, Google’s mobile platform generates considerably less revenue and fewer paid customers than its competitor, Apple Inc. (NASDAQ:AAPL)’s iOS.
Positives
The new shopping experience of Google, which was converted from free to a 100% paid service in October, will act as the backbone of Google. PLAs (Product listing Ads) form the base of User’s Google Shopping experience. Google is extracting revenue from these Ads on both cost-per-click (CPC) and Cost-per-action (CPA) basis. Around 70% of PLAs are monetized on CPC basis and the remaining 30%, are monetized on CPA basis. In the coming quarters PLA, which asserts the most important impact on retail could also influence other categories, like travel and finance. Along with this, Mobile search may also result in increased revenue for Google.
CEO Larry page is poised on strengthening the most important segments of the Google. The three strongest arrows are Google+, Android, and Youtube. These ventures of Google have been the most successful. Android has managed to become the world’s top Smartphone operating system; Youtube delivers around 4 billion video views per day, and around 90 million users have signed up on Google+.
Significant developments-Both For & Against
For
Immersion Corp announced that it entered into a License agreement with Google Inc (NASDAQ:GOOG) and Motorola Mobility Holdings Inc (NYSE:MMI) to determine all the patent infringement litigation by Immersion over Motorola. The company is paying compensation to Immersion for the prior shipment of Motorola devices containing basic Haptic technology. Both companies have also agreed to the license for the future shipment of Motorola devices.
Google saw a major relief when Apple’s lawsuit against Google’s Motorola unit, over alleged use of the patent, was dismissed by the US judge. Apple sued Google over the library of patents acquired by Motorola for $12.5 billion. Apple claimed that license practice of Motorola was unfair.
Against
Google Inc (NASDAQ:GOOG) was questioned by the UL lawmaker regarding how the company managed to pay a little portion of tax while having billions of dollars in sales. The company was questioned amid rising concerns about big companies avoiding tax.
In yet another possible disciplinary action, Google in October, was given a time period of four months to make its privacy policy comply with requests from the European Union data protection authority, or it will have to suffer disciplinary action at a national level.
Opinion
In order to continue its growth, Google Inc (NASDAQ:GOOG) needs access to a wider range of content on which it can place ads and monetize them. The strategy requires massive investment from the company to build and buy platforms to reach new content, but is the only way which can help Google stand ahead of its competitors. The core business of the company depends upon desktop searches on Google owned and operated property. Google does not need to share any revenue with the publisher partners. However, there is a downtrend in the core business line of Google. Thus, the expected upshot from the monetization of PLA in the fourth quarter and downtrend of core business keep the stock from high fluctuations.
