Google-eyed for growth

As Google leapfrogs its large cap peers, analysts are bullish and investors are buying Larry Page's innovation dream.

Google, the company that was quickly turned into a verb in a way not seen since Hoover became the Americans' choice term for vacuuming, can now lay claim to being the second biggest US company on the market.

Last Friday the tech giant leap-frogged the former number two, ExxonMobil, which has seen a slump in its shares due to low oil prices. 

Google now boasts a market capitalisation of $US400 billion compared with Exxon’s $US399 billion. Both still trail Apple, which has a sizeable lead at $US485. But those shares have been experiencing a slide and are down 5.7 per cent for the year already.

Google has ground out its position by branching out from a successful search engine to developing software for mobile devices, developing fibre networks for internet and TV, as well as expanding its entertainment content.

It has proven itself to be far more innovative than Apple, or in fact any of its cross-sector peers, through its development of products like Google Glass and investing in dream projects like driverless cars.

And investors are buying into the dream. Google shares are up 52 per cent in the past year. Industry counterparts like Microsoft and IBM have failed to capitalise on the resurgent market because, frankly, they have few new or bold ideas for growth.

Google is also coming off a good fourth-quarter result which saw revenue rise 11 per cent to $13.6 billion, surpassing expectations of a $13.4 billion result.

It is also smashing the competition in the all-important online advertising space. The company is expected to command 41 per cent of the US digital ad spend this year, with Facebook a distant number two with just 8.2 per cent.

Google is like the stock market’s Cate Blanchett heading into Oscar night with all the momentum.

Even arch-rival Microsoft, incidentally the fourth biggest US company, has turned to Larry Page’s mob to provide its Android software to power its new Nokia mobiles, expected to be unveiled later this month at the Mobile World Congress trade show in Barcelona.

What that means is that Google’s stranglehold on smart phones, of which its Android operating system powers 82 per cent worldwide, is unlikely to ease. Apple (12 per cent), Microsoft Windows (4 per cent) and BlackBerry (2 per cent) show no signs of bridging the gap anytime soon.

Google shares are trading at about $1200 a pop - pricey to say the least when you consider it is trading at more than 22 times earnings estimates for 2014, compared with the company it just overtook, ExxonMobil, which trades for less than 12 times projected profits for this year.

Since its fourth-quarter earnings, Google has forced Wall Street to take notice with all the big investment banks upgrading their price targets on the company.

Eric Sheridan at UBS bumped up Google shares from $US1300 to $US1350, with a buy recommendation for his clients.

“As Google continues to innovate, we believe it will increasingly compete with broader tech platforms across a range of businesses,” he said. “Investors will be satisfied if Google can either a) maintain flattish margins while producing mid-teens revenue growth, and/or b) provide cash returns to shareholders.”

His call followed moves by others including Citigroup, which raised its price target on Google shares from $US1190.00 to $US1350.00, and Deutsche Bank which followed suit, lifting its price target for Google from $US1220 to $US1310.

A Bloomberg analysis found that one research analyst has rated the stock a sell, eight have given a hold rating and twenty-two have a buy rating on the company’s stock.

While company rankings bounce around and ExxonMobil should not be expected to slide any further down the rich list just yet, Google has undoubtedly earned its number two position. The next test for Larry Page is to make sure that his company stays ahead of the curve and doesn’t go down along the likes of Kodak, MySpace or IBM -- examples of those that were once king but squandered their industry leading position.

Mathew Murphy is a Walkley Award winning journalist based in New York.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles