Google Inc's Earnings Confirm Its Moat Is Stronger Than Ever

Google's core businesses -- Search, YouTube, and Android -- have very strong leadership positions. The company's expansion into newer fields like home technology products and high-speed internet makes its business lines very stellar.

Ishfaque Faruk
Ishfaque Faruk
Apr 21, 2014 at 12:05PM
Technology and Telecom

Google's (NASDAQ:GOOG) been performing very well. The divestiture of Motorola Mobility benefits Google's robust margin profile. The company's market leadership positions in search, online video, and mobile operating systems are stronger than ever, and they will drive the company's stock price higher in the future.

Margin expansion
In the last quarter, Google's top line increased 19% year-over-year to $15.4 billion. Google's operating margin in the last quarter stood at 27% for a sequential increase from the prior quarter when the margin was 23%, which primarily resulted from the sale of Motorola Mobility.

Google's pre-tax earnings for the first quarter of 2014 stood at $4.47 billion and its diluted EPS stood at $5.04. The company ended the quarter with $59.3 billion in cash and securities. The company's revenue flows are reasonably diversified with 57% of its total revenues coming from outside the U.S. 

Google sold off Motorola's smartphone business to Lenovo Group in the last quarter for $2.91 billion. However, Google will retain the vast majority of Motorola's patent portfolio. Since Motorola's business was operating in the red, the divestiture of Motorola will expand the company's margins going forward. 

Strong market positions
Google's paid clicks, which refers to the number of ads Google sells through various websites, increased 26% year-over-year. However, its cost-per-click declined 9% year-over-year. The company is selling many more ads on sites that it owns as well as websites owned by its partners, but the price-per ad is going down as Google portrays more ads on mobile devices. Google's CFO stated that in the future the company will break down its paid-clicks and cost-per-click numbers by source, and this will provide incremental clarity to investors and analysts. 

Google's other revenues, which include digital sales from the Play Store, increased 48% year-over-year to $1.6 billion. As Android ramps up its market share in the mobile OS market across the globe, Google's Play store should see robust revenue growth from content and app sales. 

In the fourth quarter of 2013, Android's market share stood at 78.1% and  Apple's iOS held market share of 17.6%, according to IDC.  The combined market share of Apple's iOS and Google's Android stood at more than 95.7%, which pretty much makes the market for mobile operating systems a two-horse race. Further gains in market share by Android will lead to continued growth in revenues from Google's Play store. 

Google's development of Enhanced Campaigns has helped its advertising clients get more information about their marketing campaigns, and this should lead to higher budget allocations to various sites owned by Google and its partners. YouTube attracts more than 1 billion users to its platform, and this has been very appealing to large brand advertisers which had mainly been focusing on video ads, primarily on TV.

Newer streams of revenue
Google's acquisition of Nest Labs will lead to a newer stream of revenues for the search giant. Google paid $3.2 billion for Nest, which makes home technology products like thermostats and smoke alarms. 

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In addition to the purchase of Nest, the company has plans to diversify its revenues further. The company's Google Fiber project has been operating in three mid-sized cities, and Google is now considering expansion plans for Fiber in up to 34 cities. The company has ample financial resources to fund a much broader roll-out in the future, and this high-speed Internet business could become a significant contributor to Google's revenues.

Bottom line
Google's market-leading positions in search, online video, and mobile OS represent very strong competitive advantages for the company. The company has ramped up its measurement capabilities for the advertising campaigns portrayed by leading marketers around the globe, and this should attract more ad dollars.

In the longer term, higher pricing on mobile ads will drive a lot of growth in Google's future revenues. As consumers spend much more time on mobile devices, the company can expect higher mobile ad revenues. Relatively new business lines like Nest and Fiber will help Google diversify away from its heavy reliance on advertising dollars.