• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
November 9, 2009 Google Inc. (GOOG)Goldman Sachs Global Investment Research 1
 
November 9, 2009
COMPANY UPDATE
Google Inc. (GOOG)
Buy
Google acquires AdMob, for display advertising on mobile devices
What's changed
Google announced its acquisition of AdMob for $750 mn in stock. Foundedin 2006, AdMob serves advertisements to mobile phones and Wi-Fi-enabled devices. According to company data and a Bloomberg interviewwith CEO Omar Hamoui, AdMob handles around 10 bn impressions permonth, employs about 150 staff, and has raised almost $50 mn fromSequoia Capital and Accel Partners, among others. AdMob servesadvertising to around 7,000 mobile publishers such as CBS andAccuWeather, on behalf of advertisers such as Best Buy and Nike. Half ofits impressions are in the US, and one quarter in Asia; one quarter of itsimpressions are on each of Apple- and Nokia-brand devices. According toGoogle, AdMob is currently profitable, and the acquisition should close ina few months.
Implications
(1) We believe this acquisition extends Google’s mobile initiatives fromsearch and operating systems to display advertising, which we view asultimately a multi-billion dollar market, despite the small size of mobilescreens. Google may be taking advantage of distraction among desktopdisplay advertising companies, such as Yahoo! and AOL, to leap-frog intoleadership in mobile display advertising. (2) Including AdMob in ourforecasts, we raise gross revenue estimates by 1% starting 2Q2010. Weassume a 60% TAC pay-out ratio and a correspondingly low operatingmargin, for a sub-1% benefit to net income. We model a 0.5% increase inshares outstanding, for a net sub-1% drag to EPS. (3) Given its $22 bn cashbalance, Google can certainly use cash for acquisitions, but the sellers mayhave requested stock for tax or other reasons.
Valuation
Our 6-month target of $685 is based on DCF and P/E to normalized growth.
Key risks
Risks include Bing share gains and reinvestment in new projects.
INVESTMENT LIST MEMBERSHIP
Americas Buy ListAmericas Conviction Buy List
Coverage View:
Attractive
United States:Internet
GrowthReturns *MultipleVolatilityVolatilityMultipleReturns *Growth
Investment Profile
LowHigh
Percentile20th40th60th80th100th* Returns = Return on CapitalFor a complete description of theinvestment profile measures please refer tothe disclosure section of this document.Google Inc. (GOOG)Americas Internet Peer Group Average
Key data Current
Price ($) 551.106 month price target ($) 635.00Market cap ($ mn) 176,212.0
12/08 12/09E 12/10E 12/11ERevenue ($ mn) New 15,856.6 17,432.8 21,101.7 24,043.6
Revenue ($ mn) Old 15,856.6 17,432.8 21,041.1 23,938.1
EPS ($) New 20.09 23.61 27.60 32.00
EPS ($) Old 20.09 23.61 27.66 32.03P/E (X) 27.4 23.3 20.0 17.2EV/EBITDA (X) 13.9 13.7 11.0 9.0ROE (%) 21.4 20.6 19.7 18.7
9/09 12/09E 3/10E 6/10E
EPS ($) 6.06 6.66 6.67 6.59
Price performance chart
250300350400450500550600Nov-08 Feb-09 May-09 Aug-096507508509501,0501,1501,2501,350Google Inc. (L) S&P 500 (R)
Share price performance (%)3 month6 month12 month
Absolute22.436.666.4Rel. to S&P 50014.117.540.8
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 11/06/2009 close.
James Mitchell, CFA
(212) 357-1849 | james.mitchell@gs.com Goldman, Sachs & Co.
Ingrid Chung
(212) 902-2360 | ingrid.chung@gs.com Goldman, Sachs & Co.
Jordan Monahan
(212) 902-1879 | jordan.monahan@gs.com Goldman, Sachs & Co.
Fred Krom
(212) 902-8618 | fred.krom@gs.com Goldman, Sachs & Co.
The Goldman Sachs Group, Inc. does and seeks to do business withcompanies covered in its research reports. As a result, investors shouldbe aware that the firm may have a conflict of interest that could affectthe objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision. For Reg ACcertification, see the end of the text. Other important disclosures followthe Reg AC certification, or go to www.gs.com/research/hedge.html.Analysts employed by non-US affiliates are not registered/qualified asresearch analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
 
November 9, 2009 Google Inc. (GOOG)Goldman Sachs Global Investment Research 2
Google Inc.: Summary financials
Profit model ($ mn) 12/08 12/09E 12/10E 12/11E Balance sheet ($ mn) 12/08 12/09E 12/10E 12/11E
Total revenue 15,856.6 17,432.8 21,101.7 24,043.6 Cash & equivalents 8,656.7 14,087.0 21,643.1 30,612.9Cost of goods sold (2,641.2) (2,680.1) (3,133.8) (3,503.6) Accounts receivable 2,642.2 2,918.2 3,522.3 3,845.1SG&A (3,020.1) (2,866.2) (3,495.8) (3,968.6) Inventory 0.0 0.0 0.0 0.0R&D (2,060.8) (2,194.2) (2,751.3) (3,086.7) Other current assets 8,879.3 11,806.2 13,073.7 14,502.1Other operating profit/(expense) 0.0 0.0 0.0 0.0
Total current assets 20,178.2 28,811.4 38,239.1 48,960.1
ESO expense (1,119.8) (1,223.1) (1,415.0) (1,471.6) Net PP&E 5,233.8 5,048.0 5,895.0 6,721.5
EBITDA 9,346.7 10,954.9 13,173.7 15,208.2
Net intangibles 5,836.5 5,607.9 5,356.9 5,181.1Depreciation & amortization (1,212.2) (1,262.7) (1,453.0) (1,723.5) Total investments 85.2 110.4 110.4 110.4
EBIT 7,014.7 8,469.1 10,305.7 12,013.1
Other long-term assets 433.8 699.8 724.7 757.0Net interest income/(expense) 287.5 (18.7) 61.0 247.6
Total assets 31,767.6 40,277.5 50,326.0 61,730.1
Income/(loss) from associates 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 Accounts payable 178.0 191.9 219.7 243.2
Pretax profits 7,302.2 8,450.4 10,366.8 12,260.7
Short-term debt 0.0 0.0 0.0 0.0Provision for taxes (1,840.3) (1,858.7) (2,384.4) (2,820.0) Other current liabilities 2,124.1 2,484.8 2,816.9 3,104.8Minority interest 0.0 0.0 0.0 0.0
Total current liabilities 2,302.1 2,676.7 3,036.6 3,348.0Net income pre-preferred dividends 5,461.9 6,591.8 7,982.4 9,440.8
Long-term debt 0.0 0.0 0.0 0.0Preferred dividends 0.0 0.0 0.0 0.0 Other long-term liabilities 1,226.6 1,714.3 2,188.8 2,494.5
Net income (pre-exceptionals) 5,461.9 6,591.8 7,982.4 9,440.8 Total long-term liabilities 1,226.6 1,714.3 2,188.8 2,494.5
Post tax exceptionals (1,235.0) (218.1) (193.3) (135.3)
Total liabilities 3,528.7 4,391.0 5,225.4 5,842.4Net income (post-exceptionals) 4,226.9 6,373.6 7,789.1 9,305.4Preferred shares 0.0 0.0 0.0 0.0EPS (basic, pre-except) ($) 17.40 20.84 24.69 28.91 Total common equity 28,238.9 35,886.5 45,100.6 55,887.7EPS (diluted, pre-except) ($) 17.20 20.66 24.29 28.57 Minority interest 0.0 0.0 0.0 0.0EPS (basic, post-except) ($) 13.46 20.15 24.09 28.49EPS (diluted, post-except) ($) 13.31 19.98 23.70 28.16 Total liabilities & equity 31,767.6 40,277.5 50,326.0 61,730.1EPS excl. ESO expense (basic) ($) 20.31 23.82 28.06 32.38EPS excl. ESO expense (diluted) ($) 20.09 23.61 27.60 32.00
Common dividends paid -- -- -- --
Additional financials 12/08 12/09E 12/10E 12/11E
DPS ($) 0.00 0.00 0.00 0.00 Net debt/equity (%) (30.7) (39.3) (48.0) (54.8)Dividend payout ratio (%) 0.0 0.0 0.0 0.0 Interest cover (X) NM NM NM NMInventory days NM NM NM NMReceivable days 55.3 58.2 55.7 55.9
Growth & margins (%) 12/08 12/09E 12/10E 12/11E
BVPS ($) 88.94 112.48 137.22 169.12Sales growth 36.0 9.9 21.0 13.9EBITDA growth 35.1 17.2 20.3 15.4 ROA (%) 19.1 18.3 17.6 16.9EBIT growth 33.8 20.7 21.7 16.6 CROCI (%) 36.7 34.3 37.3 37.3Net income (pre-except) growth 26.3 20.7 21.1 18.3EPS growth 25.1 19.8 18.5 17.1
Dupont ROE (%) 19.3 18.4 17.7 16.9
Gross margin 83.3 84.6 85.1 85.4 Margin (%) 34.4 37.8 37.8 39.3EBITDA margin 58.9 62.8 62.4 63.3 Turnover (X) 0.5 0.4 0.4 0.4EBIT margin 44.2 48.6 48.8 50.0 Leverage (X) 1.1 1.1 1.1 1.1
Cash flow statement ($ mn) 12/08 12/09E 12/10E 12/11E
Free cash flow per share ($) 17.35 25.95 26.49 30.97Net income 5,461.9 6,591.8 7,982.4 9,440.8 Free cash flow yield (%) 3.7 4.7 4.8 5.6D&A add-back (incl. ESO) 1,212.2 1,262.7 1,453.0 1,723.5Minority interest add-back 0.0 0.0 0.0 0.0Net (inc)/dec working capital (298.8) 366.8 (318.0) (107.3)Other operating cash flow 1,656.2 1,313.3 1,747.2 1,607.7
Cash flow from operations 7,806.9 9,246.2 10,864.7 12,664.6
Capital expenditures (2,358.5) (1,038.5) (2,300.0) (2,550.0)Acquisitions (3,320.3) (40.1) 0.0 0.0Divestitures 0.0 0.0 0.0 0.0Others 359.3 (2,864.6) (1,218.5) (1,364.8)
Cash flow from investing (5,319.4) (3,943.2) (3,518.5) (3,914.8)
Dividends paid (common & pref) 0.0 0.0 0.0 0.0Inc/(dec) in debt 0.0 0.0 0.0 0.0Other financing cash flows 87.6 127.4 210.0 220.0
Cash flow from financing 87.6 127.4 210.0 220.0
Note: Last actual year may include reported and estimated data.
Total cash flow 2,575.1 5,430.3 7,556.1 8,969.8
Source: Company data, Goldman Sachs Research estimates.
Analyst ContributorsJames Mitchell, CFA
james.mitchell@gs.com
Ingrid Chung
ingrid.chung@gs.com
Jordan Monahan
jordan.monahan@gs.com
Fred Krom
fred.krom@gs.com
 
November 9, 2009 Google Inc. (GOOG)Goldman Sachs Global Investment Research 3
Estimate changes
Exhibit 1:
 
Google estimate changes
$ millions except per-share data
 
4Q09E2009E2010E2011E
Net revenue (new)4,90517,43321,10224,044 
Y/y growth16.3%9.9%21.0%13.9%
Net revenue (old)4,90517,43321,04123,938 
Y/y growth16.3%9.9%20.7%13.8%
Operating Income (new)2,7579,69211,72113,485 
Y/y growth24.3%19.1%20.9%15.1%
Operating Income (old)2,7579,69211,70713,458 
Y/y growth24.3%19.1%20.8%15.0%
EPS (new)$6.66$23.61$27.60$32.00
Y/y growth28.8%17.5%16.9%15.9%
EPS (old)$6.66$23.61$27.66$32.03
Y/y growth28.8%17.5%17.1%15.8%
 
Source: Goldman Sachs Research estimates.
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...