Investing in Google

According to its mission statement, Google (GOOG) aims to “organize the world’s information and make it universally accessible and useful”. Perhaps the time has come for the company to amend its statement and instead declare its intention of enhancing that which it has already created. Google may be popular for its products and services, but these are not the only benefits which can be derived from the company. Google also offers a lot of potential to willing investors. Why? The answer lies in knowing what the company is, what its business and strategy are and how it performs financially in relation to its competitors.

Since turning public in 2004, Google has become a multi-national corporation providing the most advanced search technology along with targeted advertising and an array of services aimed at enhancing user-experience. Google’s business can basically be summed up as follows: search, advertising, operating systems, platforms and enterprise.  In Q3 2011, advertising was responsible for 96% of the company’s total revenue. The company employs an active acquisition program in a business strategy which seeks to acquire and develop companies, products, services and technologies in a bid to evolve the company itself and strengthen its operating and financial position.

The aggressive ‘strategy of everything’ Google employs has so far been beneficial to the company. Generally, focusing on too many areas at the same time is counter-productive, but Google’s strength and resources enabled its strategy to work. Granted, the cost to purchase assets is high, but then so are the returns.

During the company’s  October 13 2011 Q3 Earnings Conference Call, Google’s CEO Larry Page revealed that [the company’s] revenue was up 33% for the quarter ending September 30, 2011 year-over-year , with gross revenue standing at $9.72 billion. This marked a quarter-over-quarter increase of 8%. At the end of Q3 2011, Google’s yearly revenue stood at $27.3 billion, a mere $2 billion short of the previous year’s total revenue of $29.3 billion.

In comparison, Yahoo (YHOO), one of Google’s two major search technology competitors, saw a slight revenue drop in Q3 2011 year-over-year. Revenue stood at $1.07 billion, 5% lower than Q3 2010’s $1.12 billion. Google’s other major search technology competitor, AOL (AOL), saw its revenue decline to $531.7 million in Q3 2011 year-over-year – a drop of 6%.

In August 2011, Facebook (FBOOK) was valued at $82.5 billion.  However, November saw the private company’s value plummet for the fourth consecutive month in a SharesPost auction, where it was valued at $75 billion.

Contrastingly, Apple’s (APPL) Q4 2011, which ended on September 24, proved to be the highest Q4 revenue in the company’s history. Revenue stood at $28.27 billion – a 39% increase year-over-year, when revenue stood at $20.34 billion.

Going forward, Google aims to build a strong relationship with its users through improved sharing of information and more relevant search results and adverts, according to CEO Larry Page. Increasing the company’s human assets through recruitment is another priority. An advance in technology is also on the company’s business agenda as the technology it currently provides is still in its early stages and is set to change drastically over a five-year period.

A more interactive and personal search technology would result in a better user-experience, encouraging more people to use Google’s services and attracting more advertising exposure. As a result, Google’s revenue will increase, allowing the company to enter into larger investments and consequently improve its long-term performance.

However, Google’s strategy is not all roses. The ‘strategy of everything’ may increase the quantity of products on offer, but the quality tends to suffer. Focusing on too many products at once will stretch a company’s resources thin, making it impossible to commit to every product at the same level without putting its capital efficiency at risk. In Google’s 2011 Q3 Conference Call, CEO Larry Page conceded that Google needs to focus more on the products which matter and forfeit those encumbering the business.

With a strategy involving it into every aspect of the online world, Google becomes exposed to a lot of competition, all of which has the potential of eating away at its user-base and advertising revenue. By the end of Q3 2011, Facebook had a 28% share of the total display ad market; marking a 5% increase year-over-year. Such competition could be detrimental to Google’s financial performance unless it keeps innovating through research, development and product enhancement.

Google’s business strategy also draws fierce antitrust lawsuits from various competitors. In September 2011, Google’s former partner Yelp (YELP) filed an antitrust lawsuit accusing Google of misusing Yelp’s review content and favoring Google Places in its search results, thus acting in an uncompetitive manner.

Due to the threats it faces, Google is unable to guarantee its strategy’s success in yielding a higher performance. Nevertheless, 2011 has so far been a strong financial year for Google. Its P/E ratio as of December 5, 2011 is of 20.29, with the last stock sale set at $625.65, in line with the year’s resistance level. Support level has been in the $475 region.

Past performance may not be a guarantee of future results, but it can serve as an indicator to the benefits of investing in Google.