Google's Growth Prospects

At the time of writing this, Google's market cap is already at $398 billion, making it the third most valuable company in the world behind Exxon Mobile (XOM) at $408 billion and Apple at $476 billion. Since the company is already one of the largest companies in the world, one question you may ask is how much it can still grow.

Unlike other large cap companies that have lower revenue growth rates as they grow bigger, Google's growth potential is much larger. The company earns most of its revenues - e.g. 91% in 2013 - from online advertising and is benefiting from the continuous growth of the online advertising industry. This is shown in Google's latest earnings slides that shows its consolidated revenues by revenue source between Q1 2011 to Q4 2013 (note that Google recently sold Motorola Mobile to Lenovo):

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Source: Google 2013 Earnings Slides

The online advertising industry is growing because more companies are shifting their ad budgets from offline to online advertising. Advertisers recognize that the internet is one of the best places to market their brands and products, and that Google has one of the best online advertising platforms (AdWords, AdSense and display advertising). Google ads are based on "search queries or web content," and advertisers pay Google primarily on a cost-per-click (CPC) basis. This is much more effective than other competing advertising programs that are based on "content-only, interests and/or demographics."

Aside from online advertising, Google has a lot of growth opportunities in Android. While the company does not earn revenue from licensing Android to other handset manufacturer (Android is freely distributed and modified by developers and manufacturers), it is starting to make a lot of money indirectly from Google Play - Android's app store.

According to Google's 2013 10-K report, other revenues - which are revenues from licensing, hardware and digital content (app store, music, movie and eBook downloads) -accounted for 9% of Google's total revenues. It increased from $2,353 million in 2012 to $4,972 million in 2013, representing a 111% increase in revenue in one year (see image below). The management stated that the increase was primarily due to the growth of digital content products such as apps, music and movies. If this segment continues to grow at a faster pace than advertising revenues, it will eventually become a significant contributor to Google's total revenues.

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Source: Google 2013 10-K Report

Google's Valuation

If we compare Google's current valuation with its peers, it is relatively more expensive compared with Microsoft and Apple, but it is on par with Baidu and Yahoo (YHOO) in price-to-earnings.

Google is either fairly-valued or slightly overvalued if we compare its P/E, P/S and P/B with its peers. However, I believe that the stock is at a reasonable price if you are willing to invest in it for the long-term.

A few years ago, when I first invested in Google, the stock was traded at a premium, but I believed that the company has exceptionally strong competitive advantages and that its advertising business will continue to grow. Now, the stock has grown more than two-fold because of the company's growing advertising revenues and net profits.

The Bottom Line

I believe that Google is one of the best companies for long-term investing because it is exceptionally competitive, it has a near-monopoly in the search engine market, and it still has a lot of growth opportunities in its advertising and search engine business. While it is rare that a company in the tech industry can last for many decades, I believe that Google has become a forever stock because its search engine business has become an essential service for internet users as well as advertisers.

Sources: Google 2013 10-K Report, Netmarketshare, Comscore, Yahoo Finance.

About the Author: Victor Liang is a co-founder of Intelligent Stocks, a stock recommendation service that is dedicated to helping investors outperform the market.