Thursday, February 01, 2007

Google FY06 Analysis

In the past articles in this blog, we have analyzed Google and have typically taken a bearish view of the stock. Although Google is a strong growth company that is gaining market share in the search space, it doesnt have what one would term a "wide moat". Wide moat is the ability to raise prices and not lose market share. In this article, we will look at Google's FY06 earnings and see the forecast for FY07. We will also look at the analyst estimates ( a consensus target of $600 ) and see if it makes sense. We will also look at the competitors and see how Google compares to Yahoo! and Microsoft.

First FY06 results. The reported EPS is 10.21 per share where as the diluted EPS is 9.94. The diluted share count is 309 million. The year ago figure is 291 million. The share count increased by 6.2% year over year. The EPS was below the analyst consensus estimate of 10.33/share. Consequently the Google shares went down by 3.94% the day after.

The EPS for Google is expected to be around 36% higher in 2007 compared to 2006. While it is impossible to predict the future, the accounting treatment of the stock options and awards will play a large role in the EPS for 2007.

Let us now compare the competitors Google, Yahoo! and Microsoft. Let us look at the different ratios to see how they compare.

Let us start with Yahoo! The ROA and ROE for Yahoo! for the past three years are as follows.

ROA - 11%, 19% and 11.5% respectively.
ROE - 14.7%, 24.2% and 15% respectively.

The numbers for Microsoft are as follows.

ROA - 15%, 18% and 19%.
ROE - 20.3%, 28.8% and 31% respectively.

Let us finally look at Google.

ROA - 19%, 21.6% and 19.24% respectively.
ROE - 26%, 24% and 21% respectively.

Google numbers are pretty good and it is pretty clear that Google is a superior company to Yahoo! The trailing P/E for Google is 48 which is a bit pricy compared to other top companies. The predicted forward growth rate for Google is around 35 for FY07 which is lower than the P/E.

The good news for Google is that it seems to be widening its market share compared to its rivals. Although both Yahoo! and Microsoft are interested in competing, Google seems to be ahead of the curve and increasing the lead every passing year. 2007 should be very interesting as it should show the market trends and future prospects for the search based advertizing. After trailing SP500 in 2006, it is anybodies guess what will happen to Google stock in 2007. One thing is sure - Google share holders can expect a wild ride in 2007.


Anonymous said...

I totally love your blog! Great work!

Can you guys please cover alternative energy funds and/or stocks sometime in the future? Climate change will spur investment in this field in the future. But the question is -- what are the returns going to be like?



Anonymous said...

Havent looked at them in depth - will cover it in the future.