Google Analysis

Google released its second quarter earnings last week. We will take a quick look to look at the landscape and how things are looking up.

First off, the Google growth rate is slowing. I expect next years growth rate to be some where in the 35-40% range compared to this year. If we assume on the high end of EPS this year of about 10$/share, the stock is adequately priced at 35-40% growth at $350-400.

Google did a great job in increasing its market share to the mid forties from low thirties from last year. However, Yahoo! and Microsoft are not out of the reckoning yet. Both Yahoo! and Microsoft have larger web traffic compared to Google. Both these companies need to find out how to monetize their traffic. Once vista ships, Microsoft will be directing traffic to live.com. The risk for Google in this is keyword search becomes more commodotized reducing the price for keyword. The second risk is advertisers spend less money on Google and split their budget between Yahoo!, Microsoft and Google.

Let us look at Google's balance sheets to see how things look. The stock dilution is growing at 8% year over year. From Google's financial report, "We expect that the growth rate in capital expenditures in 2006 will be substantially greater than the revenue growth rate for the year. We expect the majority of investment to be focused on IT infrastructure including servers, networking equipment, and data centers, as well as real estate and campus facilities." The free cash flow from operations is $145 million for quarter. Quarterly free cash flow in Google is far lesser compared to Microsoft. Microsoft has a monthly free cash flow of about one billion dollars a month. Income from operations is 33% of revenue and net income is 29% revenue - both of which are fairly stable.

Looking at the rest of the year and next, Google is fully priced for its growth till end of 2007. The increasing competition in 2007 from Yahoo! and Microsoft will hold the key on how Google does in the long term. If Google is able to take market share away from Microsoft and Yahoo! in search to become the defacto search monopoly, the future augurs well for the new age company from California.