Can Google, Inc. Continue its Incredible Run?

What a week for Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) fans. Since Google announced fantastic second-quarter results on July 17, shareholders have watched the high-flying Internet search giant jump nearly 5% in value. Which makes perfect sense considering that Google's results obliterated last year's second quarter and beat most analysts' revenue expectations.

But in the near term, questions should always be asked when a stock, be it Google or any other, climbs so high, so fast. Google's Class A shares were priced at $580 prior to the earnings news and now stand at roughly $607. Still, there's a lot more justification for Google's jump in value than there are concerns. But there are also challenges, of course, including Google's primary digital ad competitor, Facebook (NASDAQ: FB  ) , and its growing share of the mobile advertising market.

A couple specs
Google's $15.96 billion in revenue this last quarter was up 22% from the same period of 2013, and its $12.67 billion in revenue after discounting traffic acquisition costs handily beat analysts' consensus estimate of $12.32 billion. A slight bump in total revenue generated internationally, while not necessarily surprising, speaks to Google's desire to bring the Internet, and its search and advertising alternatives, to the rest of the world.

Google's non-generally accepted accounting principles net income (after removing one-time and extraordinary expenses) came in at $4.18 billion in the second quarter, handily beating 2013's $3.36 billion. And tucked away in Google's earnings release was the $1.6 billion it generated in "Other Revenues," a whopping 53% jump from last year's $1.05 billion. That's where Google reports its app download revenue, including its bevy of games, which is an area of focus for the company.

As always, there are challenges
While there are certainly many positives, Google's declining cost per click, or CPC, isn't one of them. The average CPC declined 6% compared to last year, and CPC for Google sites dropped 7%. The CPC declines are at least partly the result of non-U.S. markets applying pricing pressure on Google; this is the downside of the company's global ambitions.

That pricing pressure from Google's international customers could increase thanks to of a familiar foe: Facebook and its strong mobile ad growth. Google undoubtedly rules the digital advertising roost, always has. But trends in the high-growth mobile digital advertising space, while not yet alarming, are worth noting.

Just two years ago, Google commanded 52.6% of the mobile ad space, while Facebook owned a meager 5.4%. This year, Google is expected to garner 46.8% of all mobile ad spending, as Facebook's piece of the mobile ad pie will jump to nearly 22%.

A lot of upsides
Google has begun actively using its wildly popular YouTube website to get a jump-start on online video ads, something Facebook is still working toward. Video offers tremendous upside potential, not simply because it's "the next great thing," but because Google, and Facebook once its videos are up and running, can demand premium ad rates. Video will go a long way toward easing some of the advertising pricing pressure Google has experienced of late.

Many pundits agree that future mobile device growth will come from low-priced devices, especially in emerging markets. That trend is a perfect fit for Google and its Android OS. Android powers a host of low-end phones, which will open the door to new customers and ultimately more advertising revenue. Getting its new-ish drones up in the air to beam Internet access to the billions of unconnected users is another huge growth opportunity for Google, as well as Facebook (which boasts its own drone manufacturer).

Final Foolish thoughts
Google can, and does, push the innovation envelope, sometimes to its own detriment. Concerns surrounding spending, in part connected to the company's obsession with self-driving cars, Glass, and even high-tech contact lenses, could be mitigated going forward. Google's spending growth is expected to ease, which should mitigate fears surrounding the costs associated with its sometimes off-the-wall projects.

When it's said and done, there are simply too many positives to become overly concerned with Google's recent stock price jump. Don't be surprised to see some easing as short-term Google investors take their profits. But with a forward price-to-earnings ratio just over 19, and multiple long-term growth options, Google remains an absolute steal.

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  • Report this Comment On July 22, 2014, at 11:24 PM, zippero wrote:

    With a $410 bil. market cap supported by only $8-10 bil. in free cash flow this year, down from $11 bil. in FCF last year and the $13 bil. FCF peak in 2012, Google is the most overvalued big-cap stock in the history of the entire stock market, worse than Microsoft and Intel at the height of the Nasdaq Bubble. Its 50x multiple on free cash flow, which is getting demolished by the 3-fold increase in capital expenditures since 2012, is a disaster that will ruin many families financially and spiritually.

  • Report this Comment On July 22, 2014, at 11:27 PM, zippero wrote:

    Make that a 4-fold increase in capex since 2012

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