"Google has a huge new moat, in fact I've probably never seen such a wide moat." Charlie Munger of Berkshire Hathaway.
And the wider the moat, the longer the castle will stand the test of time and rivals. Probably Google Inc (NASDAQ:GOOG) has shown us what ‘moat’ really means and how best to build it; fill it with water, put crocs in it, mount archers to protect the economic castle, so the company and investment returns are safe from competition and the changing market trends. Let’s see how Google’s moat is working out for them and what can investors expect in the coming years.
Quarter 4 2012 Earnings
Google Inc (NASDAQ:GOOG) announced its Q4 2012 Earnings yesterday and Larry Page gave the detail during an earnings conference call (though he sounded like he needed coffee). He was happy to announce they have reached $50 billion in revenues for the first time. Page and the team deserve it, they have achieved this milestone in just over 15 years.
Here are some highlights of the earnings, (for full details please Click Here);
- Revenues of $14.42 billion for the last three months of 2012 (36% increase from the 2011 fourth quarter, 8% quarter-on-quarter)
- Operating income of $3.39 billion (up from $3.51 billion in Q4 2011)
- EPS of $8.62 on 335 million diluted shares outstanding (EPS in Q4 2011 was $8.22 on 329 million diluted shares outstanding)
Google pulled it off this time, given the fact that internet ads business is getting fierce and it’s only going to get tougher to rule the market. Google has a dominant market share when it comes to internet ads on desktop but people are not using desktops as much as they used to – everyone is switching to mobile devices, an “uncharted territory” for Google. According to estimates, 30% of the searches are now made from mobile devices (probably it will double in just a few years).
Google Inc (NASDAQ:GOOG) is in a direct competition with Facebook Inc (NASDAQ:FB) over mobile ads. Both companies are making aggressive efforts to capture the mobile market as early as possible. But Google has an edge. Estimates suggest that Google will take the lead and will have a very profitable 2013 in terms of mobile ads. Nomura estimates that mobile search revenue will be ~89% of their estimated 17% YoY 2013 Earning.
Analysts that are raising concerns that Google will have some trouble in mobile ads are only comparing it to its previous performance. Because of their wide financial moat they have the larger global market share on mobile than on desktop.
Google’s Percentage Global Share of Desktop and Mobile Global Search Markets, 2012E
Morever, Google’s U.S. mobile search product has ~5x more users than its nearest competitor Yahoo! Inc. (NASDAQ:YHOO).
Google is the biggest search engine – fact, Chrome and Android have Google as their default search engines – fact, over 72% mobile devices sold in the Q3 2012 had Android as their OS – fact, result; Android is becoming the ‘Windows’ for mobile.
For these reasons Google Inc (NASDAQ:GOOG) would want to give Chrome and Android, its moat gators for free, because both are just the door knobs to their shop; the Google search engine. Google hasn’t developed these two as products to profit from, they are like one push button that opens business for Google from any desktop or mobile device. Carriers and phone manufacturers are in fact being paid by Google to put Android in their phones so why wouldn’t you see Android everywhere? Hence the ‘moat’ is strengthened and you see a stock performance that looks like this;
Great strength has been shown in the ads department but one major concern that analysts are showing is mobile ads – Google hasn’t captured it yet the way it did the desktop market. One reason why Google hasn’t generated huge profits from mobile advertisements is that companies don’t pay much for mobile ads – this is comparatively a new market so they’re not sure of its productivity.
As a result Google ears less money from advertisers. It’ll take some time for this haze of uncertainty to clear. In the future mobile ads’ productivity would be more accurately calculated and hence companies like Google will be able to better charge for ads space.
Investors also have their concerns about mobile ads and how it can negatively affect Google but I’m positive that Google will get the lion’s share in mobile ads too. Looking at Google’s moat strategy, things become clear and reaffirm that Google will repeat its desktop performance – Android upgrades