Free Research Paper on Google Inc.
Google Inc. (NASDAQ: GOOG) is a Mountain View, CA based internet services company. Its main course of business is focused on indexing websites and linking users’ searches (according to keywords) to corresponding content in those websites that seems to match the search. This free service, offered in 117 languages (as of October 2008) has turned Google websites to a top online destination and its brand to the world’s best known name. Leading Fortune’s 100 Best Places to Work list, Google employs 20,133 full-time employees as of September 30, 2008 (Google Inc., 4)
Google’s income is mainly based on advertising revenues; the latter account for 97% of total revenues, composed from paid click ads on its own websites and Goggle Network web sites (66 and 31 percent in 2008, respectively) (Goggle Inc., 13).
The company’s business method is rather simple: each time a user clicks on an ad, Google collects a payment from the advertiser. If the ad appeared in one of Google Network web sites, Google will share the revenue with the site.
Google offers various online services which Datamonitor (22) summarized in six main groups:
a. Google.com services: e.g., Google WebSearch (the internet’s leading search engine, Google Image and Book Search, Google Finance, Google News and video search (Google Video and YouTube)
b. Communication, Collaboration and Communities: e.g., Google Docs & Spreadsheets, Calendar, Gmail and Blogger
c. Downloadable applications: e.g., Google Desktop and Toolbar
d. Google GEO: Google Earth, Google Maps and Google Sketchup
e. Google Mobile: mobile applications of some online products such as Google Maps, Gmail and News
f. Others: mostly search and advertising services such as Google Adwords and AdSense.
Nevertheless, as mentioned earlier, Google does not generate much revenues from most of its services; its various advertising (mostly word-ads) platforms is the main source of income. Unlike most of its competitors, Google’s business concept makes it an attractive partner also for small businesses and websites.
Established in 1998 by two Stanford graduates, Google is now a public company (first IPO in the NASDAQ on August 2004) with a market capitalisation of $94.46 billion.
With its diversified product portfolio, the company competes, although not always leads, mainly against other software and internet giants such as Microsoft, Yahoo!, Time Warner AOL and eBay.
Financial strengths and concerns
The data mentioned above reflects outstanding financial performance, usually well above the industry benchmark. However, the 5-year analysis does not weigh properly the effects of the recent trends in both financial and underlying markets and the evidence of an economic slowdown.
Google’s ratios reveal a low dependency on debt levering, a possible indication of limited exposure to money market trends. Its high margins, as well as returns on capital and employees also look pretty efficient management and investments.
However, due to its exposure to small and medium businesses and a relatively high receivables turnover, it is possible to Google will experience a relatively high bad debt expense in the near future.
The most significant change in Google, which can be already seen in its 2008 reports, is a significant decline in growth; during the first three quarters of 2008 Google’s yearly growth (earning per share, quarterly average) was 27%, compared to an average of about 48% on Q1-3/07, a decrease of 64%. This is a major concern, especially due to the fact that the company’s revenues are almost not diversified and that Google invest in numerous initiatives which do not generate any material cash flows (for example, Google has almost doubled its R&D budget in 2007 to about $2.2 billion).
Projected Pro-forma statements for one year
As seen in the table below, Google’s growth in revenues was decreased by an annual average of 30% throughout 2006-2008. As mentioned before, 2008 growth is exacted to decease by 48%.
If this trend will continue, we should expect an annual growth rate of 20% to about $23.4 billion.
Summary of financial performance
While being innovative and courageous in its business activities, Google’s financial management seems rather conservative and serves as a highly effective backbone to the internet giant.
Google’s decline in growth should be considered in respect to the macro and the conditions in the internet services industry, in which Google still outperforms.
Economic slowdown will most probably lead to a decline in advertising budgets. Google may see a decline in revenues, but it is also possible that its rather cheap and effective advertising services will be seen more attractive.
The company’s 2008 Q3 report show an improvement in cash flows, assets and liabilities management.
Necessary improvements are still required in several fields, including its increasing accounts receivables.
Opportunities and recommendations
The high-tech industry is heavily based on long-term investments. Start-up companies, which develop future trends in the industry, are this extremely vulnerable to changes in money markets due to their high R&D costs. The result is a devaluation of many companies despite their potential.
Google is a well established company and a leader in its market, but does not succeed to generate material cash flows from operations other than advertising in its own and partners’ websites. Unlike some of its competitors, such as Microsoft, Google’s M&A activities were based on purchasing established internet services, while retaining its costly R&D “in-house”.
It would be advised that the company will try to take advantage of the recent devaluations of companies and use its more than $1.7 billion free cash flows (Google Inc., 12) to purchase premature start-up establishments, in particular those which will enable a faster diversification of its revenues portfolio.
In addition, the company has weak presence in the social networking domain, especially in English speaking markets (Datamonitor, 25). A major acquisition of an existing provider is needed here, although it would be less attractive in financial terms.
These investments should have relatively limited impact on Goggle’s short-term income from advertising operations. However, by opening new operational platforms they can provide a more diversified revenue structure.
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