Google - company analysis

Topics: Financial ratio, Balance sheet, Financial ratios Pages: 6 (2088 words) Published: October 1, 2013
Executive Summary
Google is one of the leading companies in Internet Information Providers industry, which controls over 66 percent of the internet search market. The company has developed a vast portfolio of products to support its expansion strategy, with Android OS, Google Docs, Google Maps, and the Social Network Google+, among many others. Its primary source of revenue is generated from advertising. Despite the sluggish economy of past years, Google managed to consistently increase its revenues at an average pace of 23 percent per year, increasing its total shareholders’ equity by 286 percent since 2007. The company maintains healthy financials with significantly lower than industry average debt to equity ratio of 25 percent. Its P/E ratio has been consistently decreasing in row with its maturing industry. The company is a dominant player in its sector and is expected to maintain its position in the foreseeable future. Google offers a lucrative investment opportunity for the patient investor who expects higher than average returns and is tolerant to short term market fluctuations. Overview

Google’s business is comprised of the following critical areas: search, advertising, operating systems and platforms, and enterprise. The business is highly competitive and very dependent on changes in technology. The company’s competitors range from industries other than those similar to Google’s, like Yahoo, and Microsoft’s Bing, to social networking sites, ecommerce sites, providers of online services and products. In 2011 the company generated 96 percent of its revenue from advertising. Spending on advertising is highly correlated with economic cycles, as well as buying and budgeting patterns, hence the company is highly susceptible to overall health state of the market. The company has never paid dividends, although recently Google’s board has approved an issue of a non-voting class of stocks that will bear dividends. This is essentially a two to one stock split. Since the company is known for advertising, the revenue it gains comes from 2 sources: Google websites and Google Network Member’s websites (Appendix A, figure 1). The company’s revenues are affected by the number of paid clicks through the advertising program and also by the average cost-per-click paid by the advertisers. For the last 3 years, the company has seen an increase in these revenues, which were a result of increased spending by advertisers as well as the weakening of the US dollars in comparison to the other foreign currencies. The primary costs and expenses incurred by Google are cost of revenues, research and development, sales and marketing, and lastly, general and administrative. Cost of revenues constitutes almost half of the company’s revenues and has been consistently decreasing from 37.4 percent in 2009, to 35.5 percent in 2010, and 34.8 percent in 2011 (Appendix A, figure 2). Cost of revenues includes primarily traffic acquisitions costs, as well as expenses associated with the operations of data centers. Google conducts business in different countries and it has significant international revenues and costs expressed in foreign currencies. International revenues accounted for approximately 54 percent of the company’s total revenues in 2011 and more than half of user traffic has been coming from outside the U.S. One major impact on the company is the fluctuations in currency exchange rates, which ultimately affect Goggle’s profitability in its domestic currency. When there is substantial instability between the US dollar and other foreign currencies, the company’s income may be adversely affected. Operating costs may also increase due to such fluctuations. When it comes to interest rate risks, Google is taking proactive measures as it does with foreign exchange rates. Given the global nature of the business, most company’s assets are invested in highly liquid debt instruments of the US and foreign governments, municipalities, time deposits, money...

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