Alphabet (GOOGL) stock has risen exponentially since its IPO in 2004. Google has grown via acquisitions and technologically-advanced product launches. Today, Alphabet is a leading e-commerce company with diverse software and hardware products. If you missed the boat, don’t worry—stalwart investor Warren Buffet did too.
Google’s founders Larry Page and Sergey Brin made a humble beginning by organizing Internet search results in 1996. They initially deemed the service “Backrub,” as the search ranked the sites with more backlinks at the top. However, they soon replaced this name with “Google,” which had a mathematical connotation.
The company took a step forward when it received funding from the cofounder of Sun Microsystems, Andy Bechtolsheim. Google also raised another $25 million from venture companies. However, the company took a big leap when it launched its IPO in 2004.
Google’s financial growth
Google’s financials have grown multifold in the past 15 years.
The company’s net sales rose almost 56x from the second quarter of 2004 to $38.9 billion in the second quarter of 2019. In 2004, its ad revenue from its own properties and network properties drove its sales by adding 49% each to its top line. While the company’s own property revenue has risen 80x, its network members revenue has risen 15x since its IPO.
High growth in revenue from Google’s own properties has raised its contribution to total earnings from 49% in the second quarter of 2004 to 70% in the second quarter of 2019. This is a favorable scenario, as the company’s TAC (total acquisition cost) is much higher for member properties than its own properties. In the second quarter of 2019, Google’s TAC for its own properties stood at 13% compared to 69% for member properties.
Google’s acquisitions and launches
In the past 15 years, Google has ventured into many high-growth business segments via a series of acquisitions. Some of the prominent ones are YouTube (video sharing site) in 2006, DoubleClick (online advertisement company) in 2007, Motorola Mobility (consumer gadgets maker) in 2012, Waze (traffic application) in 2013, Nest Labs (maker of Internet-connected video cameras, thermostats, and smoke detectors) in 2014, and HTC (cell phone hardware maker) in 2017. These acquisitions have strengthened the company and its foothold in the tech industry.
Google has also launched a series of applications and services in the past 15 years. In 2005, the company launched satellite imagery and driving directions app Google Maps and provided 3D mapping technology with Google Earth. Then Google launched Google Talk, its chatting program. The company leaped forward in 2008 when it introduced Chrome, a lightweight, fast web browser. In 2010, the company provided high-speed Internet with Fiber.
In 2013, Google’s technological innovation bloomed with Google Glass, a headset with a see-through lens. It could display text messages, maps, reminders, and the like. Google also entered into a competition with Amazon (AMZN) Fire and Apple TV (AAPL) with Chromecast, its content streaming device.
In 2016, the company launched Google Home Devices, which provided voice control for home devices and spoken queries with its AI technology. These devices stood in competition with Amazon’s Alexa and Apple’s HomePod. Google also formed Waymo by spinning off its self-driving tech company. To learn more, read Alphabet’s Waymo Is Planning Massive Expansion of Taxi Service.
Wall Street expects Google, the online conglomerate, to expand fiercely in the next few years. Google’s EPS, which stood at $0.3 in the second quarter of 2004, now stand at $14.21 in the second quarter of 2019. Analysts expect the company to post EPS of $48.8 in 2019, reflecting 12% YoY growth. Next year, in 2020, analysts expect Google’s EPS to rise 14% to $55.8.
Rising revenues from mobile search, YouTube, and the cloud could support the company’s future earnings growth. It’s investing heavily in expanding its cloud business salesforce to compete with majors such as Amazon and Microsoft in the arena. Sales in Amazon’s Amazon Web Services segment rose 37% YoY, while Microsoft Azure’s sales rose 64% YoY in the latest quarter. Google’s other revenues, which include its cloud business, increased 40% YoY to $6.2 billion. Google’s revenue from its own properties rose 18% YoY to $27.3 billion in the quarter. Strong growth in YouTube drove its mobile search growth in the quarter. Its network revenue rose 9% YoY to $5.3 billion driven by Google Ad Manager and AdMob.
The company is quite optimistic about its cloud business. On its second-quarter earnings conference call, its CFO, Ruth Porat, said, “Cloud was the largest driver within Other revenues and the third-largest driver of revenue growth for Google overall. In fact, in the second quarter of 2019, as Sundar mentioned, the annual run rate for Cloud revenues was over $8 billion and Cloud continues to deliver significant growth.”
Google’s valuation compared to its peers’
Google stock is currently trading at a forward PE of 22.6x. This valuation is almost in line with its peers’. Facebook (FB) and the Walt Disney Company (DIS) stocks are currently trading at forward PEs of 22.5x and 22.8x, respectively. Facebook stock rose after its revenue growth accelerated in the second quarter. However, Disney stock has fallen sharply since its latest earnings, which has affected its valuation.
Further, Twitter (TWTR) and Apple are trading at forward PEs of 25.2x and 16.6x, respectively. While Apple’s earnings surpassed estimates, Twitter’s revenue topped estimates. Apple and Twitter rose after their latest earnings.
However, Amazon and Netflix (NFLX) are trading at high forward PEs of 61.4x and 64.8x, respectively. Netflix’s second-quarter earnings beat analysts’ estimate. However, its subscribers grew more slowly than expected. Amazon stock slumped on its second-quarter earnings. The stock is also in the limelight due to recent remarks by politicians. To learn more, read Are Politicians Targeting Amazon Stock?