Wednesday, April 29, 2015

Google V. Facebook Battle: Thoughts On Google's Earnings And Reasons Why I Will Remain A Shareholder

The first stock I ever purchased in my life (right in the middle of the financial crisis, I may add) was Google (NASDAQ: GOOGL) I still remember the day back in the summer of 2008 and my excitement to finally be a part-owner of such an incredible company.
The main reasons why I bought Google were, and still remain-- its strong brand, its severely strong leadership status within its industry, an incredibly large market share within the industry of search engines (62.3% worldwide as of February 2015). The word itself was used so much it became a verb.
When I started my position in Google, Facebook (NASDAQ: FB) was not yet a publicly traded company and not really going full force in to the advertising industry, at least not as much as it is today.
However, I am well aware that times are changing and I am not surprised that in recent quarters (including this past one) Google has been announcing a slowing in advertising revenue. I am completely aware of the competition that is out there and is something I am not necessarily worried about. Before I go in to the reasons why, here are some of the highlights that caught my attention during the Google earnings call this past Thursday 4/23/15:

  • First quarter 2015 revenue came in at $17.3 billion, a 12% year over year increase in comparison to same quarter last year. (As per CFO, excluding changes in foreign currency exchange, growth would have been 17% year over year).
  • Total advertising revenue came in at $15.5 billion, a 11% year over year increase in comparison to first quarter 2014. However, a 5% decrease in comparison to last quarter (fourth quarter 2014).
  • "Other revenues" (non-ad related) came in a bit over $1.7 billion, a nice 23% year over year increase in comparison to fourth quarter 2014 (a 2% decrease in comparison to last quarter earnings).

Google also announced that their aggregate cost per click (the average price they charge advertisiers for online ads) decreased by 7% year over year. CFO Patrick Pichette, attributed this in part to YouTube's 'skippable' ads which return a lesser revenue (YouTube currently allows users to skip advertisement after approximately 4 seconds).
If this were not an option, CFO indicated cost per click would actually be growing. It has been indicated Google is in the process of launching paid ad-free subscriptions for YouTube. However, this has yet to be implemented. 

Why I know Facebook is a major threat in Advertising

Although I am not yet a shareholder of Facebook, I do understand their business model when it comes to advertising and their incredible advantage. Facebook's benefit is that they have the real time information of billions of people (1.4 billion active users worldwide as of first quarter of 2015). Not only do they have people's names but they have their gender, their relationship status, their "likes" (things they are interested in) and an ongoing amount of information that members willingly disclose.
Major companies looking to save in advertising dollars and looking to make their ads more strategic and specific, can easy tell Facebook what kind of people they are looking to target and Facebook can provide the specified audience immediately. I see this as the new face of advertising in the coming years and beyond and is something Google cannot yet compete with.
Google: At the forefront of innovation
Now, why doesn't it necessarily worry me that Facebook is eating away at Google's advertising dollars? It should come to no surprise that long gone are the days in which Google focused solely on advertising as source of revenue. It is true that they remain profitable for the most part due to advertising and that they are still the leader. In fact, during their last annual deport ending December 31st, 2014; Google did announce that 89% of their revenue came from advertising dollars.
However, it is also true they have been diversifying away from that for quite some time now. We've heard about their successful Android and YouTube acquisitions which happened in 2005 and 2006 respectively, in addition to their innovative creation of tools used all over the world such as Gmail and Google Chrome. Below is also a list of some pretty cool stuff that are still in the development phase:
  • Driverless cars
  • Google Glass
  • The use of Android operating system to automate your entire home
  • Android-powered smart watches
  • Partnerships with pharma companies to create pills that could diagnose and treat medical illnesses
  • "Project Loon"-initiatives to bring internet access to the entire world (sometimes we forget there are still billions of people in this world living without this privilege)

This excerpt in their most recent annual report for year ending 12/31/14 is a perfect example of how Google sees their business and the world:
"Many companies get comfortable doing what they have always done, making a few incremental changes. This incrementalism leads to irrelevance over time, especially in technology...people thought we were crazy when we acquired YouTube and Android, and when we launched Chrome...We won't become complacent, relying solely on small tweaks as the years wear on...we will not shy away from high-risk, high-reward projects because we believe they are the key to our long-term success. We won't stop asking "What if?" and then working hard to find the answer."
Final Takeaway:
As subsequent quarters come and go, my plan is to keep an eye on what exactly is happening to advertising dollars and cost per click. I want to see that they are doing something about the slowing ad revenue and the role of new developments in supplementing said revenue.
As a huge fan of dividend paying stocks, I have to say this is one of the very few companies in my portfolio that doesn't pay dividends and I am okay with it. I feel that the company has been doing a fairly good job when it comes to strategic acquisitions and remaining innovative. 
If you are not yet a shareholder of Google I'll recommend you do some research and consider starting a position during a pull back. Decide for yourself if this is a company you'll see around for generations to come. My personal opinion is that they will be and I'm excited to be part of the journey.
Tell me, are you a Google shareholder? Do you think the company can remain profitable even if Facebook ends up taking away a significant market share in the advertising space?
Disclaimer: Please do not invest or cease to invest solely based on the information in this post. Please do your own research for any security you may be considering adding to your portfolio.

Disclosure: currently LONG on GOOG/GOOGL