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Is Google a Good Investment?
How Well Do You Know Google?
A Guide to the Hercules of the Internet



Google Inc. is classified as an Internet information provider. As you well know, Google runs an Internet search engine. The industrious Google robots prowl the Web every night, analyzing and categorizing web pages. Google seeks to organize the world's information and make it useful, relying on its powerful search technology.

A very successful company has developed from the brainchild of Larry Page and Sergey Brin, who founded Google in 1998. Their studies at Stanford University led to the design of a new architecture for data mining and then to the programming of an Internet search engine. With headquarters in Mountain View, California, Google employs 5,680 full-time people.

How does Google make money?

In addition to the search reports you use every day, Google offers specialized searches, image searches, maps, news, shopping and desktop search tools. There is also free email, free blogging and free video hosting. Google earns most of its money by selling ad space on the web pages it delivers to us when we use these free features. This advertising service Google calls AdWords. Those ubiquitous interactive text ads from Google are the most successful instance of PPC, pay per click advertising. Google also displays text ads on the web pages of other sites, too, sharing ad revenues with content publishers, a feature it calls AdSense.

Google doesnít write ad copy. Google doesnít draw or animate ads. What Google does is deliver ads and Google has a lock on Internet ad delivery.

Whatís the outlook for Internet advertising?

The Interactive Advertising Bureau has reported record Internet ad revenues, approximately $4.2 billion, during the third-quarter, 2006. During this quarter, Internet advertising spending rose 33% from the same period a year ago, and rose 2% from the previous quarter. In addition, the Bureau said 2006 is also on pace to exceed the earlier records for Internet advertising in any year. It looks like 2006 will be the best year ever for Internet advertising dollars

You can tell that there is plenty of room for growth in the business of online advertising. At present, online ads account for only 3% of overall ad spending. It is likely that the Internet will get a bigger piece of the pie next year. With the availability of the services like Google, marketers are leaping into interactive Internet advertising.

How is Google growing?

Growth continues at Google. The buzzwords for the growth of the Internet are Social Networking, Video Sharing, Community, Culture, Commerce and Content. Google has both feet solidly planted at the head of the line, with strategic advantages in all these areas.

The most recent deals will put Google search features on cell phones, so that the Internet is truly mobile. Along with its cell phone search engine, Google will bring its cell phone advertising.

Recently Google acquired the video sharing site YouTube, one of the hottest properties on the web. The purchase price of $1.65 billion for YouTube sets a new record in the valuation of user-generated media sites. YouTube is part of the "clip culture" revolution and makes the Internet more event-driven. Suppose you could invite a few friends to a private chat room online, select a Google movie and watch it there together? How virtual is that?

Google is aggressively building a radio sales force around its dMarc acquisition, so that it can place radio ads at stations around the country. In a similar move, Google has set up an online resource to provide print ads to newspapers.

Now Google is wheeling and dealing again. Google will be paid to distribute YouTube videos to Verizon cell phones. The next venture may be a Google Health Initiative, in which Google runs a search bank for medical research and physician diagnostic information. Google might become the repository for genetic information from the human genome project. Will we be using Dr. Google in the near future?

In the meantime, Google is quietly expanding its portfolio of software applications with the proposed purchase of browser-based spreadsheet service iRows that was announced this week. (November 14, 2006)

We see how Google searches out the seeds of innovation, acquires them and puts them into the Google hothouse of development.

How is Google doing financially?

In the year ended December 31, 2005, Google earned a mighty 1.465 billion dollars. Revenue for the same year was over $6 billion dollars. So earnings were 24% of revenue, a mind-boggling performance. Next letís look at how fast revenues are growing. The revenue figures are $6 billion for 2005, $3 billion in 2004 and $1.4 billion in 2003. Compare 2004 to 2005 and youíll see that revenues more than doubled. Of course, growth like this wonít continue forever, but itís another indicator that Google provides a valuable service.

While revenues doubled, how did earnings perform? 2005 net income was $1.465 billion; 2004 net income was about $400 million; 2003 net income was $105 million. So, while revenue doubled, earnings more than tripled. Usually you only see this kind of growth in companies that are very small, the micro-cap stocks. This strength is remarkable in a company of Googleís size.

Letís get closer and look at quarterly revenues for the past 4 quarters. Sept 2006 sales were $2.690 billion, up from $2.456 billion in the June quarter, even though summer is the slowest season of the year for Google. Revenues for the quarter ended March 31 were $ 2.254 billion. Revenues for the quarter ended December 31 were $1.919 billion. Quarter by quarter, Google is delivering strong growth in sales.

Likewise, quarterly income shows consistent growth across the past four quarters, $372 million, $592 million, $721 million and $733 million. Total earnings for the most recent 12 months are $2.419 billion. Given that there are 306.16 million shares outstanding, and each share is worth $491, the stock market has valued the Google colossus at $150 billion dollars.

The company has no short-term or long-term debt and, before its YouTube purchase, was sitting on $3 billion in cash as of 9/31/2006. Its financial statements are squeaky clean, without any special adjustments, extraordinary items or suspicious accounting changes.

Google has strong following among stock analysts and investment institutions and is a member of the S&P100 Index

How expensive is Google stock?

A share of Google sells for $491 today. (November, 2006) In the past four quarters, Google has earned $7.88 per share. The P/E ratio, price divided by earnings per share, is 62. This means that a share of Google stock is priced at 62 times what it has earned in the past 12 months. A PE ratio of 62 is indeed high compared to other companies. The reason that Google has a high PE is because it is expected to earn much more than $7.88 per share in the coming year. Because Google is in fast growth mode, it has a high P/E ratio. Google is an expensive stock, not because it sells for $491 a share, but because it sells at 62 times its earnings per share.

Conclusion

Google is a company that provides ad-sponsored Internet services, all the while staying focused on creating a clear revenue stream and a scalable business model.

This industry is just in its infancy. Who knows whatís coming down the pipeline? Certainly, we will be using the Internet tomorrow in ways we never dreamed of today. I predict that Google will be masterminding our progress every step of the way.

I hope life brings you much success. I wish you a very happy day.
-----     Surfer Sam  



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