3 Reasons Why Google Is a Great Buy

Google's  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) earnings for the fourth quarter revealed a profit that fell short of analyst estimates. The slowdown was due to an 11% decrease in ad prices. The company reported earnings per share of $12.01 on $16.86 billion in revenue. Analysts had expected stronger earnings per share of $12.21 on $16.7 billion in a revenue. Despite this, the company's new product plans in the broadband business, its initiative in the wearable devices sector, and a new smartphone product for emerging markets illustrate why it should be a long-term investment.

Changing the speed of fiber
Google's cost-per-click decreased by 11% in the fourth quarter. The company wants to enter the high-speed broadband market with fiber Internet speeds of one gigabit per second. Recently, Google announced the product has entered some markets. To show its seriousness, Google plans to extend Fiber into 34 new cities. What does this mean for Google's bottom line? It's hard to put a number on how disruptive the new product could be in the sector. However, in a new report, Evercore Partners forecasts that the build-out of the fiber optic Internet network will cost about $7 billion for roughly 8 million U.S. homes by 2022. Google will grab 3 million subscribers over the next 7-9 years. If this proves true, Google would rank ninth among today's broadband service providers.

Changing the wearable devices game
Last quarter, Google's aggregate paid clicks increased by 36% on a year-on-year basis. However, the latest numbers from IDC show that worldwide smartphone growth is slowing. It hit 39.2% between 2012-2013, but it is expected to be just 6.2% in 2018. So, Google has to look for a way beyond smartphones to bring more people within the Android ecosystem. The company recently revealed plans to release a software kit based on its operating system. The product would enable developers to create a range of applications for wearable devices. Does this mean Google has a game-changer? Perhaps it's too early to jump to such a conclusion. But, the wearable devices sector is projected to have sales of $20 billion by 2016, according to research firm IHS. If Google gets a sizable share of the market, its aggregate paid clicks will show improvements.

Changing the smartphone market
Motorola mobile segment revenue in the fourth quarter was $1.24 billion, but this was affected by $105 million in Google's intersegment and deferred revenue. Google seemingly left the mobile handset space by selling Motorola to Lenovo for $2.9 billion. However, the tech giant hasn't forgotten about its goal to bring cheap smartphones to emerging markets.

In this space, the cost of a typical smartphone is the obstacle that prevent people from purchasing their first device. The concept behind Google's Project Ara is to allow customers to piece together their own smartphones. Google expects the entry price for a phone to be $50. For the sake of comparison, Nokia's Android-powered X smartphone for emerging markets is sold for approximately $120 per unit. Does Google have a prospect in this venture? Despite saturation in mature markets, the demand for low-cost computing in emerging markets will drive the industry forward. IDC predicts that emerging markets will all post market-beating growth rates in the smartphones sector from 2013-2017.

Competitors
Apple
(NASDAQ: AAPL  ) has problems that include a perceived lack of innovation since the death of Steve Jobs. Still, the company posted first-quarter revenue of $57.6 billion and net quarterly profit of $13.1 billion, compared to revenue of $54.5 billion and net quarterly profit of $13.1 billion in the year-ago quarter. Not content with this, the company is moving into new areas to secure a dominant position. Apple unveiled CarPlay a few weeks ago. The solution is a means for an iPhone to power a touchscreen on a vehicle's dashboard. Worldwide auto sales for 2014 are expected to rise 3.4%, according to research firm IHS. The new infotainment system market could be big in the next few years. Apple has wasted no time in taking an early lead.

Samsung (NASDAQOTH: SSNLF  ) is the biggest manufacturer of Android-powered handsets. Due to a slowdown in smartphone sales, its operating profit fell 6% in the last quarter over a year-on-year basis. Samsung also needs to improve its earnings in the present quarter. However, the company recently unveiled its Gear 2 smart watch lineup, powered by the new Tizen operating system. Already contending with Apple's iOS, Google will not be happy with the emergence of Tizen. Analysts have speculated that Samsung's use of Tizen may be responsible for Google's decision to use its operating system in the wearable devices category. Going forward, Samsung's revenue from the initiative could be significant. According to Canalys, over 5 million smart watches will be shipped by the end of 2014, an increase of 900% on a year-over-year basis.

Foolish bottom line
Of course, consistently pushing the edge of the innovation envelope means some projects will never materialize. But, Google's latest innovations are already creating waves. The company's plans in the wearable devices sector, initiatives in the broadband business, and a new smartphone product for emerging markets explain why Google should be a long-term investment.

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  • Report this Comment On April 08, 2014, at 4:42 PM, GaryDMN wrote:

    Is this a joke? What products? Do you mean vaporware? Products are made to be sold and Google has never had a successful hardware product, the Chromecast may be the first, if it is even profitable. Glass was announced over a year ago and still doesn't have a ship date. None of the other "products" you mention is shipping and are just hype at this point. One reason not to own Google, is their big money maker, ads, have seen a decline of almost 30% in profit margin over the least 3 years, from 36% to 26%. It is facing increased competition from all angles too.

  • Report this Comment On April 08, 2014, at 4:44 PM, longview23 wrote:

    Interesting analysis but very short term view of Google - All of this stuff is missing the biggest asset that Google has and will always have no matter what innovations they produce - they have the best demographic data in the world and its only a matter of time until they start capitalising this asset as they remove it from the "free" public domain as they have already started to do.

  • Report this Comment On April 08, 2014, at 6:15 PM, sj95135 wrote:

    I follow your columns very carefully. Your analysis was pretty much correct based on last few write-ups. The day you wrote from 30 days later stocks are matching with your predictions. Keep it up good work. I am little cautious on Google because of heavy price but seems like market value that is way. As compared all high priced stocks google is the company to own.

  • Report this Comment On April 09, 2014, at 2:57 AM, Interventizio wrote:

    I sold Google before a 100% run, and for the most idiotic reason. I wish I could buy it again, but I'm not sure about the valuation right now.

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