Google (GOOG) is one of the biggest stocks on Wall Street, with a market cap of nearly $400 billion. But many investors forget that despite the hype around GOOG stock and its latest high-tech efforts, Google’s balance sheet remains very much the same as it has always been — heavily dependent on web advertising.
Consider that in 2013, Google revenue topped $59.8 billion, and more than $50.5 billion of that came from advertising. That’s a whopping 84% of total sales.
So why are investors so ginned up about GOOG stock and products like its Android smartphone OS despite this continued reliance on advertising?
Because while Google hasn’t moved wholly away from its dependence on advertising, it continues to branch out at an impressive rate. And before you know it, GOOG might be far more than just a play on Internet display ads — it could be a true tech powerhouse with its fingers in every piece of consumer technology.
Google Revenue: Ads Matter, But Growth Matters More
Revenue is indeed growing, up from a total revenue of $37.9 billion in 2011, and that is why GOOG stock has run up nicely in the past few years.
Specifically, Google stock is up about 270% from the March 2009 lows, significantly outpacing the 170% returns for the S&P 500 in the same period, and significantly outpacing other major online ad players AOL (AOL) and Yahoo (YHOO) in the long term.
And while there hasn’t been much top-line impact yet from Google’s latest offerings, it’s important to note that the growth beyond its advertising business is still substantial; it’s just not enough to move the needle dramatically on a stock like GOOG.
Click to Enlarge Take the “other” line on Google’s revenue breakdown. Sales have more than doubled from 2012 to 2013, going from just under $2.4 billion to almost $5 billion. Also, 2013 “other” revenues are more than triple the $1.4 billion from fiscal 2011.
The rate of growth is not only impressive — it’s widening.
Sure, that $5 billion is admittedly just 8% of total revenues. And sure, the margins on some of these new consumer products like Google Glass and Chromecast aren’t impressive and won’t be driving the bottom line significantly anytime soon.
But the fact that a $400 billion company like Google is ambitiously — and successfully — pivoting away from a dominant online advertising business is incredibly important to acknowledge if you’re an investor.
The Future of GOOG Stock
The big question, then, for GOOG stock investors is whether advertising will stay dominant and whether these new revenue efforts will continue their brisk pace.
Recent Google earnings show that there are risks on the advertising front. Ad rates (known as “cost per click” in the online advertising game) were down 11% year-over-year despite the fact that volume was up. That reaffirms the troubles shown both buy Google and competitors like Yahoo across last year.
Still, the “other” revenue growth seems to be more than enough to both fill the void on the balance sheet and please Wall Street. Consider:
- Android, Google’s dominant smartphone OS, commanded about 79% of global market share at the end of 2013. Apple (AAPL) and its iPhone software iOS came in at just 15%, and Microsoft (MSFT) and its Windows Phone software tallied under 4% to come in a distant third. That kind of scale is crucial to building out future Google products and mobile revenue to drive GOOG stock.
- Google Fiber, the ambitious Internet access plan which will compete with Verizon (VZ), Comcast (CMCSA) and other telecom service providers, is expanding into as many as 34 new cities. And while this is a very expensive endeavor to undertake on the construction side, the potential for big long-term returns is noteworthy. After all, once people get plugged in, they could stay Google Fiber subscribers for decades if the chips fall right.
- Chromecast, Google Glass and a rumored 3D phone named “Project Tango” prove that despite divesting itself of Motorola — selling part of the business to Lenovo (LNVGY) for about $3 billion — GOOG certainly has not given up on consumer technology.
My two cents: Google is a risky bet, but one worth taking.
GOOG stock faces very real advertising pressures ahead in the short-term. Facebook (FB) has supplanted the old model of advertising ad nauseam on web pages for some marketers. And more importantly, FB ad rates have managed to swim upstream even as advertising metrics continue to decline for sites like Google and Yahoo.
But long-term, the potential of Google Fiber and “other” revenue projects is real, and it’s highly unlikely that Google will see significant disruption — just a plateauing in previously impressive advertising growth.
With about $19 billion in operating cash flows and $61 billion in the bank, not to mention a willingness to spend that money and evolve, it’s hard to bet against a smart and ambitious company like Google.
Particularly when that “other” revenue category is growing so fast lately.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.