Today I am going to take a look at four of the world's leading web hosting and search engine companies to see what opportunities they present for investors. In this day and age, companies supplying these services also tend to offer many more services than just web hosting and searching. Hence, there may be hidden investing opportunities here. In this article, I will focus on Google , Yahoo! , AOL and Sohu . I chose these four companies because I believe they best represent the diversity of the search engine industry.
Overall, Google had a disappointing third quarter. Yet the more I look at the company's report, the less disappointed I become. Third quarter results included revenues up 45% to $14.1 billion, but profits dried up by 22% to $6.53 per share. The culprit was narrowing margins, and blame can be placed on lowered ad click revenue, with a 15% average price drop, along with greatly increased costs. The cost issue is a combination of Google's Motorola purchase, along with its efforts to get into the hardware industry with its line of laptops.
I view Google's problems as a very temporary set of issues. Google management sees cell phone monitization rising three fold this year from last year, to $8 billion. Certainly, focus can be made on squeezing costs out of the Motorola purchase. I look for earnings, if not to match the last five years' average growth of 37%, to at least advance in the mid-teens going forward, giving Google a PEG of just over 1.0.
The stock price has fallen nearly 15% since third quarter earnings were released, and I look at this as a buying opportunity on this technology leader. Google has an impeccable balance sheet with long-term debt about 4% of capitalization, but it does not pay a dividend. For that reason, Google is not suitable for all investors, but for those not needing current income, Google is a winner.
Looking ahead, Google is making headway in its bout against Apple through its Google Play stores. According to a recent article from Forbes,
"In the inaugural study released by app analytics firm, App Annie Intelligence, data shows that, worldwide, the Apple store is seeing revenues four times larger than the Google Play store, but isn't growing at an impressive rate - in fact, the year-to-date growth actually is greater for the Google Play store at 311% compared to iOS at 12.9% in 2012."
Additionally, Apple only beat out Google on free app downloads by a slim margin. But looking at free app download growth rates, downloads for Android apps grew 48% so far in 2012, compared to growth of 3.3% for the iOS.
Yahoo! is often perceived as an older and smaller version of Google. However, it is not as if Mayer walked into a dead company when she took over last summer. Yahoo! has over 700 million users worldwide, outstanding news, sports, and shopping sites, and vast assets scattered around the globe. What it did not have is any of the "coolness" factor that companies like Google and Oracle have.
In the interview, Mayer disclosed her goal to bridge the "coolness" gap by recruiting top tier managers, and improving employee morale. Mayer's focus is the cell phone market, and specifically, the monetization of cell phone use. I have Yahoo! mail and messenger on my smartphone, and see no reason why more effective, revenue-producing advertising could not take place.
Financially, Yahoo! sold about half its stake in Alibaba in the third quarter, resulting in an after-tax, non-recurring gain of some $2.8 billion in the third quarter. It plans to return that to shareholders though share repurchases, which, when combined with the $3 billion 2009 buyback, will retire shares outstanding in 2009 of about 1.4 billion down by about one third by 2015. Whether that is the best use of cash is debatable, as Yahoo! has been selling for over its book value. Absent that big one time boost, earnings in the third quarter for Yahoo! of $0.33 per share were still well above the $0.23 recorded in the third quarter of 2011, and full year 2012 earnings are likely to be at least 20% above 2011, even eliminating the one-time gain.
Can Yahoo! keep up this momentum going forward? Can Mayer really turn Yahoo! into "Google lite?" New energy and ideas can be a powerful combination, and analysts at Goldman Sachs have been raising their expectations for Yahoo!'s stock price to the $24 per share level, a nice premium of 26% from the recent price. This would be on top of Yahoo!'s gain of 30% since September.