Google Earns Its Racing Stripes: Fool by Numbers

On Oct. 18, search and marketing giant Google (Nasdaq: GOOG) released third-quarter earnings for the period ended Sept. 30. The results?

• Build a great search engine and the users will come. And then you just have to monetize that service-to-user relationship -- which happens to be the company's other core competency. The result is a 57% yearly revenue jump, coupled with strong profits.
  
• The margin slide comes from a hiring spree over the summer, where the company picked up a crop of college graduates while their caps and gowns still had fresh champagne stains. Google added more than 2,100 new employees in the quarter, including about 300 in the Postini acquisition, and most of them set up camp in the engineering and sales/marketing department.
  
• While the stock may look expensive at more than $630 per stub, given the earnings improvements, that's a trailing P/E ratio of around 50. Compare that to the likes of fellow e-commerce giants Amazon (Nasdaq: AMZN) and Baidu (Nasdaq: BIDU), which have trailing P/Es of 124 and 188, respectively.

(Figures in millions, except per-share data)

Income Statement Highlights

	Q3 2007	Q3 2006	Change
Sales	$4,231	$2,690	57.3%
Net Profit	$1,070	$733	45.9%
EPS	$3.38	$2.36	43.2%
Diluted Shares	316.6	310.6	1.9%

Get back to basics with the income statement.

Margin Checkup

	Q3 2007	Q3 2006	Change*
Gross Margin	60.7%	61%	(0.3)
Operating Margin	31.1%	34.6%	(3.5)
Net Margin	25.3%	27.3%	(2.0)

*Expressed in percentage points.

Margins are the earnings engine.

Balance Sheet Highlights

Assets	Q3 2007	Q3 2006	Change
Cash + ST Invest.	$13,087	$10,429	25.5%
Accounts Rec.	$1,888	$1,031	83.1%

Liabilities	Q3 2007	Q3 2006	Change
Accounts Payable	$232	$207	11.8%
Long-Term Debt	$0.0	$0.0	N/A

The balance sheet reflects the company's health.

Cash Flow Highlights

	Q3 2007	Q3 2006	Change
Cash From Ops.	$1,633	$1,004	62.6%
Capital Expenditures	$553	$492	12.3%
Free Cash Flow	$1,080	$512	110.9%
Owner Earnings	$767	$387	98.2%

Free cash flow is a Fool's best friend.

Competitive Context

	Market Cap	Trailing P/E Ratio	CAPS Rating (out of 5)
Google	$197,731	49.1	**
Yahoo! (Nasdaq: YHOO)	$38,826	54.3	**
Microsoft (Nasdaq: MSFT)	$292,959	21.8	**
Focus Media Holding (Nasdaq: FMCN)	$6,297	59.5	****
Omnicom Group (NYSE: OMC)	$17,344	19.3	****

Source: Yahoo! Finance.

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