This Could Be Big for Google
Alphabet Inc (NASDAQ:GOOG) just reported earnings and investors didn’t like what they heard from the search engine giant. GOOG stock was down about six percent pre-market on Friday on news that the company missed on its top and bottom lines. Google also reported weaker-than-expected growth in one of its main ad metrics.
After a great run over the last few years, GOOG stock is finding itself in a bit of a rut. It’s now down about four percent for the year.
But there’s still a lot to like about Google. Here are three catalysts that should get GOOG stock back on its upward trend:
Despite having a market cap of about $500 billion, expectations for Google are still sky-high. Even the slightest stumble can send shares downward; that’s what happened here with GOOG stock after the first-quarter earnings report.
Revenue for the first quarter was $20.35 billion, up 17% over the previous year, but analysts were expecting $20.38 billion. Similarly, non-GAAP earnings per share (EPS) were $7.50, but analysts were expecting $7.96 a share. Earnings growth was still great, which represents an increase of 16% over the same period last year.
Google’s advertising sales generate the bulk of the company’s total revenue and that category performed well. Sales were up 16% over the previous year, paid clicks were up 29%, but costs per click fell nine percent. GOOG stock got dinged a bit on this front too because investors were expecting paid clicks to increase 32%.
This just shows how fickle investors can be. Nothing bad happened. Ad sales may have been a tad light, but it’s still growing at a good pace. It would be wise for investors to not lose sight that Google is still a moneymaking machine.
And that’s even more impressive when you consider how big the company is. Alphabet’s first-quarter revenue growth of 17% was better than all but two companies with a market cap of at least $25.0 billion during the last year. (Source: “Google keeps Alphabet on track despite a stumble or two,” Live Mint, April 22, 2016.)
Google dominates the search engine market and that’s important because the more people use Google to search for things on the Internet, the more ad dollars Google will get. No one comes close to Google’s domination of the market, with 88.3% market share. (Source: “Worldwide desktop market share of leading search engines from January 2010 to January 2016,” Statista, last accessed April 22, 2016.) The next closest rival is Microsoft Corporation’s (NASDAQ:MSFT) “Bing,” with only a 4.85% share of the global search engine market.
Not surprisingly, Google also dominates the market for search ad revenue. According to research firm eMarketer, Google holds 54.5% of the market. (Source: “Google Will Take 55% of Search Ad Dollars Globally in 2015,” eMarketer, March 31, 2015.) The next closest competitor is Baidu Inc (NASDAQ:BIDU), which benefits greatly from China’s ban on Google. Baidu has 8.8% of the market.
All of this bodes very well for GOOG stock over the next few years.
During Google’s conference call, CEO Sundar Pichai was ecstatic about the company’s cloud push. Cloud revenue is included in Google’s “Other Revenue” category. Google didn’t disclose how much revenue its cloud services are generating, but Pichai noted that growth is strong.
It was only last year that Google started to take its cloud computing business a lot more seriously despite trailing market leaders Amazon.com, Inc (NASDAQ:AMZN) and Microsoft. And that’s great news for GOOG shareholders because the market is taking off.
The cloud computing market is expected to generate $27.4 billion in sales this year, compared to $14.9 billion in 2014, according to Synergy Research Group. (Source: “Amazon and Microsoft to Face Off in Cloud Computing Space,” Market Realist, February 9, 2016.)
According to Morgan Stanley, Google’s cloud business generates only $500 million a year, which is not even close to the $9.6 billion Amazon rakes in from its “Amazon Web Services” (AWS). (Source: “The Tech Exec Who Wants the Cloud to Be Google’s Moneymaker,” WIRED, March 23, 2016.)
But the search engine giant has been beefing up its cloud division since the company named Diane Greene as chief of the cloud business in November. Just last week, Google announced that it is going to open cloud data centers in Oregon and Japan, with plans to add another 10 centers over the next 12 to 18 months.
Google has already lured away some of Apple Inc.’s (NASDAQ:AAPL) business with Amazon, and has secured customers such as Spotify, The Coca-Cola Co (NYSE:KO), Walt Disney Co (NYSE:DIS), and Home Depot Inc (NYSE:HD).
Investors should be on the lookout for Google’s cloud computing business to take off over the next few years.
Google is also pushing into the Internet services provider space with its “Google Fiber.” During the earnings call, Google said that the largest chunk of the $280 million in capital expenditures in its other bets segment went to Fiber.
From all the other bets, which include driverless cars, “Nest”, life sciences, hands-free payments, and many other pet projects, Fiber is showing the most promise.
With Fiber, Google says that its goal is to offer blazing-fast speed at less than what the cable giants charge. Google Fiber offers 1,000 Mbps for $70.00 per month. By comparison, the average Internet speed in the U.S. is 12.6 Mbps. (Source: “Average Internet Speeds Up, But U.S. Still Has Work to Do,” PC Mag, December 18, 2015.) Comcast Corporation (NASDAQ:CMCSA) recently launched a 2,000 Mbps service on its existing cable lines, but its way too expensive for most people, as it costs $300.00 per month.
Google has so far been slow to lay down cable across the country, launching Fiber in only a handful of cities. But there might be a good reason for that—Google is working on beaming wireless broadband into homes and businesses. (Source: “Google Fiber wants to beam wireless Internet to your home,” Re/code, April 14, 2016.)
If Google is successful in launching the technology, it could uproot the telecom industry. It could solve the so-called “last mile” problem. That’s the part of the broadband connection between the network in a given area and the building that wants Internet and it can be very expensive. Last mile connections are generally only viable in areas that are densely populated. That’s why there are still so many areas of the U.S. that still do not have access to high speed Internet.
Google can make a fortune with the technology, as it would bring Internet service to millions of Americans living in rural areas, something that the established cable giants have no interest in doing.
The Bottom Line on GOOG Stock
Google’s first-quarter results may have disappointed investors a bit, but there’s still a lot to like about Google. Ad sales are still growing nicely, the cloud business is about to take off, and wireless high-speed Internet could be a big catalyst down the road. Investors should still take a closer look at GOOG stock.