New Idea: Google (GOOG) Part I

Introduction

If there is such a thing as a ubiquitous company, it has to be Google. Founded in the late 1990s, this company has successfully defined the user’s experience on the internet since its inception. With (arguably) the best search results around and a wide array of gadgets and applications to use, Google has become a one-stop shop for internet interactions. Check your email? Google Mail. Need directions? Google Maps. Want to stay in touch with friends from college? Google Groups. Did your stocks make money today? Google Finance. How about watching videos online? Youtube.com. Collaborative document editing? Google Docs. Real-time communication? Google Talk. All of this without even mentioning that “to google” is actually a verb in the English language.

The internet user can experience the internet in almost its entirety without leaving Google’s umbrella of applications and services. With new advances on the horizon (Google Wave is the most exciting of them), it doesn’t appear as if Google ‘s vice grip on the internet shows any signs of loosening.

Lost in all this is a question that a lot of people had a lot of trouble answering in the early stages of the internet: How does a search engine make money? Quite simply, GOOG has devised an exceptional service to target advertising at the most likely-to-buy targets by observing their online interactions (whether through google.com, gmail.com, or any of their other products) and placing advertisements which correspond to key terms. 97% of Google’s revenue comes from this activity, so this is what we are going to explore.

In essence, GOOG makes money every time you are on the internet. That is why they work so hard to make the internet more accessible. In the end, their model of bringing free, premium content whose potential revenue cannot always be conceptualized in the moment only enhances the firm’s value. Google Earth, Google Scholar, and Google Books represent this segment of their business.

Now for some numbers: Google has a market capitalization of $197 billion. They hold over $12 billion in cash/equivalents. In the past 9 months, they’ve generated almost $17 billion in revenue (up 5.5% from last year). They are presently trading at 40x last year’s earnings, which means that the market is anticipating serious growth.

All in all, GOOG looks like a stock that the market is expecting big things from – for good reason. In the next few days, I’ll analyze why I think this stock is poised to continue to appreciate in value.

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