31 Mar

Google Sacrifices Operating Margins for New Ventures

WRITTEN BY Puneet Sikka

Google’s operating margins continue to decline

Google’s (GOOG) (GOOGL) operating margins were 23% in 3Q14 and 24% in 4Q14. Margins were between 27% and 28% over the previous several quarters, as the chart below shows. So why this decline? There are a number of reasons why the company’s operating margins have declined over the past six months.

The search advertising business continues to be a high-margin business for Google because it commands higher rates. A user coming to Google’s search platform is looking for something specific. So, the advertisements can easily target a user’s specific search query.

Google Sacrifices Operating Margins for New Ventures

Yet Google’s search ad business is becoming saturated. Now, the bulk of the company’s revenue growth comes from businesses such as YouTube and Google Play. But according to Google, these are low-margin businesses—Google Play in particular.

Another reason for the declining margins is Google’s continued efforts to invest in new ventures such as self-driving cars, Google Fiber, and Google Glass. Some of these projects take time to materialize, while others get shelved. For example, Google recently put the Google Glass project on hold because it wasn’t meeting expectations. In such cases, the company has losses to bear, and these can impact operating margins overall.

The entire Internet industry is struggling

And it’s not just Google. A number of Internet companies have increased their investments dramatically. Facebook (FB) expects to increase its investments by 50% to 70% in 2015 compared to 2014. It’s looking to increase investments in new areas such as Oculus, WhatsApp, and the Internet.org project. Twitter (TWTR) continues to make operating losses, and Yahoo (YHOO) is barely able to make operating margins that break even.

For diversified exposure toGoogle, you can consider investing in  the PowerShares QQQ Trust, Series 1 (QQQ). QQQ invests 3.75% of its holdings in Google.

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