This document provides an analysis of Google stock. It notes that while Google's stock is trading at lower price-to-earnings multiples than in the past, concerns remain about its declining return on equity in recent years. The analysis rates Google as a "hold" in the short term but a "buy" in the long term, estimating the stock should be trading 27% higher based on earnings projections. It also summarizes Google's business operations, industry competitors, and strengths and weaknesses such as its strong brand but reliance on advertising revenue.

1. Equity Research Analysis
Natalie M. Asher
www.nataliemasher.com
30 Sep 2011

2. INVESTMENT OVERVIEW
Google is trading at lower P/E multiples than seen in the past. The company’s free cash of $2.6 billion
helps prepare for adequate future growth to remain competitive in the Technology sector. Concerns exist
about the effectiveness of Google’s ability to create return with its funds from shareholders, as ROE has
had a consistent decline or plateau for the past five years. This may be the result of a growing firm that is
beginning to stabilize its growth and it cannot sustain its historically high levels of return. However, more
mature competitors like Apple and Microsoft offer higher levels of ROE and ROA than Google currently
provides.
Google is poised for further growth via acquisition and in-house development. We have yet to see how
the acquisition of Motorola Mobility will affect Google as a competitor. The patents will help against
competition and litigation, but the strategic use of the hardware business that is MMI has yet to be fully
flushed out. Google could use the acquisition to take a
more Apple-esque approach to controlling end-to-end
product quality, or it could try to spin the business off
without its patents. The hardware business does not garner
As of 29 September 2011: the same margins as online advertising, but could be a
strong strategic more for Google by being involved in all
GOOG: $524.22 aspects of a user’s online and mobile experience. Google is
known for allowing a certain level of autonomy by its
Mkt. Cap. $168.51B
acquisitions. As it continues to build its portfolio of
companies it will need to ensure this acquisition model is
Shares: 322.89M
still relevant and operationally efficient to garner expected
returns.
Short Term Rating: Hold
Long Term Rating: Buy
Using a current P/E multiple of 18.91 and an estimated EPS of $35.17, Google’s stock price should be
trading near $665.04; a 27% increase from its current trading price. While this is a positive indicator the
stock is undervalued, current volatility in the market negatively impacting Google’s stock price is likely not
over. For more information on the financial analysis please see the Financial Overview.
$800
$700
$600
$500
$400
$300
$200
2006 2007 2008 2009 2010 2011
Figure 1: Google Stock Price

3. COMPANY
Google is the world’s largest online content search engine provider working toward the effort to “organize
1
the world’s information and make it universally accessible and useful .” The search giant has made leaps
and bounds toward this mission over its 13 year history; improving its proprietary search algorithm and
adding a diversified portfolio of products to aid in gathering and organizing data. The company’s main
areas of operations comprise:
 search (e.g. Google);
 advertising (e.g. AdWords, AdSense);
 operating systems and platforms (e.g. Google Chrome OS, Android); and
 enterprise solutions (e.g. Gmail, Google Maps, Google Docs, Google Sites, Picasa, Google
Analytics, Google+)
The company earns the overwhelming majority of its income (96% in 2010) from advertising sales via
products like AdWords and AdSense. Recent acquisitions help prime Google for other revenue avenues
like smartphones, but the margins on these avenues are not as profitable as ad sales.
SECTOR AND INDUSTRY
Google is part of the broader Technology sector and the Internet Information Providers industry.
However, the company continues to battle fierce competition from companies across multiple industries.
Internet Information Providers Industry
by Market Cap.
GOOG
23% YHOO
33%
2% WMH.L
8% BIDU
LNKD
31%
Others
3%
Figure 2: Industry by Market Cap.
The sector is characterized by rapid product development and short product lifecycles. Major competitors
include Microsoft, Apple, Amazon, Yahoo, Baidu, and Facebook. Promising start-ups are acquired by
industry leaders nearly as fast as they launch. According to Yahoo Finance the Technology sector is
averaging a P/E ratio of 15.95, while the Information Providers industry is above average, at a P/E ratio of
28.80. The industry is expected to see growth, but concerns exist about whether earnings and valuations
are inflated again, as in 2000.

4. SWOT
STRENGTHS W EAKNESSES
- Strong brand image - Revenue diversification
- Portfolio offering - Litigation
OPPORTUNITIES THREATS
- Acquisitions - Intense competition
- Developing products - Web spam and content farming
- Advertising growth - Foreign exchange rates
- Government regulations
STRENGTHS
Strong Brand Image
Google is among the most highly valued brands in the world. In the most recent brand ranking by WPP’s
Millward Brown BrandZ study Google was ranked second, just behind Apple. The brand had spent the
previous four years at the number one rank.
Portfolio Offering
Aiding in Google’s staying power as a highly valuable brand, the company offers a strong portfolio of
high-quality products. The company is known for releasing products in beta stages and releasing timely
updates to improve user experience based on feedback. This product development model has proven
very successful for Google.
The portfolio offering allows a user to organize their online content with one login across a plethora of
Google apps. Android phones are being activated at nearly 500,000 units a day; far above Apple or
Microsoft’s smartphone offerings. Creating efficiencies in the online and mobile user experience and
product loyalty through an end-to-end product offering allow Google access to a wealth of information.
WEAKNESSES
Revenue Diversification
Although online advertising is expected to increase, a business model that relies overwhelmingly upon
one source of revenue – advertising – is a risk. Should Google see downturns in advertising demand,
especially given current economic conditions, this could adversely affect revenues and operating profit.
Litigation
Litigation is a reality of the technology industry. Patent infringements, acquisitions, intellectual property,
and a host of other matters could require significant resources and funds to settle matters of conflict.
Furthermore, should Google ever lose in litigation, the payments could bring additional downside impact
to profits, technology, and image.
OPPORTUNITIES

5. Acquisitions
Although Google takes pride in its innovative nature and in house product development, large growth has
been sustained with the help of a plethora of acquisitions over the years. Google states in their 2010 10k
report they invested $1.8 billion during 2010 into various acquisitions to lay the groundwork for future
growth. Among the company’s most notable acquisitions are YouTube (2005), GrandCentral
Communications aka Google Voice (2007), DoubleClick (2008), Zagat (2011), and Motorola Mobility
(2011).
Owning a hardware company (MMI) will likely have a negative impact on company margins – online ads
are a more profitable business segment than smartphones. However, the acquisition gives Google highly-
coveted access to patents. Other acquisitions like Zagat bring more reliability and quality to online content
in apps like Google Places. Google is known for allowing a certain level of autonomy by its acquisitions.
As it continues to build its portfolio of companies it will need to ensure this acquisition model is still
relevant and effective.
Developing Products
Google’s acquisitions and in-house development have created more opportunity for Google to own the
entire online experience for a user. Provided that Google can assimilate acquired companies and
technologies in a timely manner, the company has an opportunity to increase user loyalty. Among
Google’s most promising new products are new developments within Android, Google TV and Google
Wallet.
Google has entered into deals with MasterCard, Citi, Sprint, First Data, and Visa for its Google Wallet
product. By allowing users to make purchases with their phone Google will have access to spending data
and can improve advertisement offerings. Product offerings like these, combined with the now Google-
owned Motorola products allow Google to work toward end-to-end control of products for user experience
and product quality; a critical competitive advantage of competitor Apple.
Advertising Growth
Internet advertising has increased significantly and the trend is expected to continue. The BIA/Kelsey
Group expects online advertising to grow at an annual rate of nearly 25%. The group also predicts that
small and medium businesses will change to 30% offline advertising and 70% online advertising by 2015.
Google can directly benefit from these changes in the way businesses communicate with customers.
These benefits can be seen in ads on their traditional Google platform and their mobile ads, as they
increase their presence in the smartphone arena.
THREATS
Intense Competition
Google’s competition comes from many avenues such as:
 traditional search engines, like Yahoo and Microsoft’s Bing;
 niche search engines, like WebMD and Expedia;
 social networks, like Twitter and Facebook;
 software companies, like Apple and Microsoft; and
 other forms of advertising media, like newspaper, billboards, TV, and radio.

6. Google’s industry is defined by rapid product development and constant new technologies. The merger
between Yahoo and Microsoft gives Microsoft more competitive edge against Google in searching and
gathering search metric data.
As competition increases from existing competitors and new start-ups, who have the potential to develop
more rapidly than larger companies like Google, Google will need to focus efforts on improving existing
products and remaining an innovative powerhouse.
Web Spam and Content Farming
Web spam websites employ tactics to violate Google’s search engine quality policies, while content farms
compile significant amounts of low-content data. Both attempt to rank higher than they would normally
earn in search results. If schemes like these are successful they can negatively impact user experience.
Google has decreased the amount of spam and content farm hits by half over the past five years within
English-language results, but recent increases have raised concern. Google has recently made
improvements to its algorithm to reduce the effectiveness of the evasive measures of web spam and
content farms.
Foreign Exchange Rates
Because Google generates revenues outside of the US it is exposed to exchange rate risk. In 2010
Google recorded a net loss of $124 million in translating foreign currencies to US dollars; mainly due to
the dollar strengthening against the Euro. Google does employ some financial investments to offset
potential losses, but those also carry their own inherent investment risk.
Government Regulations
The US market comprised 48% of Google’s revenue in 2010. As Google expands into new countries and
US regulations change the company will need to maintain compliance with each government’s respective
regulations. The resources, possible litigation, and public relations efforts required to effectively manage
changing regulations could impact margins.
Government regulations can also affect the level of service Google can provide to new segments,
possibly impacting its brand and user acceptance. Take China for example; the government requires
Google to turn over any data it stores in China and censorship of search results. Google had two choices
– turn over personal user data or store information outside of China. Google chose the latter, which
meant that services like Gmail and YouTube were not an option for local Chinese users in the beginning.
Combined with search reliability results and competition from leading local search provider Baidu, Google
continues to struggle with its Chinese relationship. As Google expands into new political environments,
challenges like these will not be uncommon.
FINANCIAL OVERVIEW
REVENUE AND EXPENSES
Google’s revenue growth is decreasing, as would be expected as their revenues reach well into the
billions and the online advertising market matures. Although I expect Google’s revenue to continue to

7. grow with the increase of advertising media moving to online content, it is not expected to sustain
historical levels.
Google’s compound annual growth rate (CAGR) for revenue since 2001 averages 91%. This figure is too
aggressive for future growth predictions, but the CAGRs for the past five and three years provide a more
moderate 37% and 21%, respectively. Because even Google is not immune to the global economic crisis,
I expect impacts from spending habits and the weighting of the US dollar versus other foreign currencies
to keep revenue growth in check. A moderate revenue growth rate of 29% for 2011 and 37% the next two
to three years is reasonable. Due to Google’s intentions to grow on strategic acquisitions and invest in
their corporate infrastructure, I also expect expenses to grow at a similar rate, around 27% for 2011 and
then at 36% for the next two to three years. The historical and predicted growth rates can be seen in
Figure 3 below.
Revenue vs. Expense Growth
(in millions)
60,000 450.00%
400.00%
50,000
350.00%
40,000 300.00%
Total Expenses
250.00%
30,000 Revenue
200.00%
Y/Y Rev. Growth
20,000 150.00%
Y/Y Exp. Growth
100.00%
10,000
50.00%
0 0.00%
2006
2001
2002
2003
2004
2005
2007
2008
2009
2010
2011
2012
Figure 3: Historical and Future Revenue vs. Expenses
CASH FLOW
Google’s free cash flow for Q2 2011 was $2.6B. The company has generally increasing free cash flow,
which aids in funding Google’s inorganic growth and other product development. As Google expects to
continue its acquisitions and invest in new product development to remain competitive free cash flow will
be an important factor.

8. Free Cash Flow
(in billions)
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Figure 4: Free Cash Flow
EARNINGS PER SHARE (EPS)
Google does not pay out dividends and reinvests all profits back into the company. One of the results of
this has been a steady increase in earnings per share. The annual growth rate for EPS since 2001 is
94%. As with the revenue growth rate, this is not a sustainable level. More appropriate levels of growth for
estimating are in line with the five and three year growth rates of 42% and 26%, respectively. Using an
estimated 32% growth rate for 2011 Google’s EPS should be near $35.17 for the year.
Using a current P/E multiple of 18.91 and the estimated EPS, Google’s stock price should be trading near
$665.04; a 27% increase from its current trading price.
RISKS
The Weaknesses and Threats listed in the SWOT analysis are an already formidable list of risks to keep
in mind. An adverse change to any one of these factors could have an undesired impact to stock price.
Additional operational concerns, such as losing key executive management, could impact stock price
unfavorably. Furthermore, Google is characterized as a large cap growth stock, and any investor looking
to add Google to their portfolio must be willing to tolerate the considerable swings associated with the
stock. While the returns for shareholders have been rewarding, Google pays no dividends. Google will not
provide the stability that investors looking for dividend paying stocks often require.