Foolish Forecast: How Google Gets Its Groove On

Tonight, it's second-quarter earnings time in Mountain View, Calif., as Google (Nasdaq: GOOG  ) revs up the reporting machinery. The first quarter was golden, but is there any gold left in them thar hills? Let's find out.

What Fools say:
Here's how Google's CAPS rating stacks up against some of its peers and competitors:

Company

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

Microsoft (Nasdaq: MSFT  )

$235.2

14.7

***

Google

$168.2

37.3

***

Yahoo! (Nasdaq: YHOO  )

$31.0

30.5

**

Baidu.com (Nasdaq: BIDU  )

$12.5

128.7

***

IAC/InterActiveCorp. (Nasdaq: IACI  )

$5.0

N/A

***

Data taken from Motley Fool CAPS on 07/16/2008.

Google bears fall into two categories. All-star CAPS player RobertLutzI personifies the first camp of skeptics: "Great company, but too expensive." The other half don't believe in a business model based on online advertising and a battery of free consumer services.

On the bullish side of the fence, the mood is harder to pin down. Many players go all Peter Lynch on us and profess their love for Big G's products and services, while some others simply see an industry leader with a beaten-down stock. Almost-all-star os400 offers this flash of insight into what makes Google tick:

Microsoft's model was to put a computer in every home. Google's model is to replace the home computer with a browser and put the brains in a central computer. I believe Google's model will win over time.

What management does:
Growth is slowing down in percentage terms, which is completely understandable and a sign of maturity. It's much easier to double $1.7 billion of trailing net earnings (as Google did in Q1 2006) than to repeat the feat with the current $4.5 billion haul. More importantly, the margins are fairly stable -- and the cash flow take is accelerating quarter by quarter.

Margins

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Gross

60.2%

60.1%

60.1%

60.1%

59.9%

59.8%

Operating

33.8%

33.5%

32.4%

31.7%

30.7%

29.9%

Net

29%

29%

27.5%

26.9%

25.3%

24.9%

FCF/Revenue

15.8%

15.2%

17.4%

19.4%

20.3%

20.4%

Y-O-Y Growth

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Revenue

72.8%

68.4%

63.6%

60.7%

56.5%

50.8%

Earnings

110%

106.5%

78.6%

66.5%

36.6%

29.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
A great search engine, paired with an equally impressive advertising solution, begat a solid, high-margin revenue platform from which Google can launch forays into new business ventures. In 10 years, today's search engine may be as stale and forgotten as the Xoom.com of 1998 (who?) is today. But by then, Google could be running TV advertising services, doing voice-command searches on video content, or perhaps producing user-friendly hybrid cars. I don't know exactly what the company will be into, and neither does Google's own management. The beauty of it all is that the G-Man is willing and able to adapt to changing business conditions and embrace fresh opportunities as they come along.

That long-term vision makes me want to hold on to my Google shares. As for the short-term results we'll see tonight, there are no signs that this money train is stopping anytime soon. According to independent research firm Hitwise, Google controls 69% of the U.S. search market -- up from 64% a year ago. For now, that's the bread and butter in the Mountain View pantry, and there'll be plenty to go around.

Further Foolery:

Microsoft is a Motley Fool Inside Value selection. Google and Baidu.com are Motley Fool Rule Breaker srecommendations. Try any of our Foolish newsletters today, free for 30 days.Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund is a Google shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.


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