Financial Research of the Google Inc.
Investment in corporate business remains an important and attractive issue that may be influenced by huge investment potential. Publicly traded companies demonstrated various dynamics of stock growth during the long and short term. However, each company has its individual pace of growth, because it has different possibilities to enter the foreign market, occupy large niches, ensure high long-term profitability, satisfy shareholders, etc. Consequently, the choice should rely on proper finance research of the demanded, relatively stable company with strong strategic and resource potential. For example, Google Incorporated (Google Inc.) provided the growth of the share price and appears to be excellent choice for investment.
Rationale for Selection
Google Inc. has been chosen because this company represents a profitable toolset for capital growth. It is evident that investment in Google promises high returns with minimal risk. Such a possibility has existed since 2004, when the company’s shares were sold on stock exchanges. Google Inc. provides two types of shares: Class A is dedicated to general circulation and Class B (preferred stock) available for the employees only.
The development of communication means and the Internet allows buying the shares even on foreign stock exchanges. There are long-term and short-term options for investment in the shares of Google Inc. The short-term option involves the purchase of the shares not to receive dividends, but to resale them as soon as possible after the shift of exchange. Investing through a broker by such a scheme will not work, as the interest for the service will cut almost all the profits. The main disadvantage of this option is the amount of investment accessible for investors with regard to fluctuations of a price. Direct access to stock exchanges requires significant capital, which narrows the circle of shareholders to the largest and most reliable business partners. This may be the advantage of investment in Google Inc., as large investments are usually carried out by the investors with vision and long-term priorities. It can form a stable supply for the corporation and thereby protect other investors from business losses.
In addition, the choice of Google Inc. as a potential object of investment was made due to the benefit of long-term investment. It involves making a profit from the payment of dividends on shares or selling them years or even decades after the purchase. The expectations of an investor to receive an increase in share value in several years can be justified. Given the dynamics of the development of Google, this growth may be continued. The company provides an advantage of a long-term approach where high initial capital is not needed and brokerage services are available for such investments, which simplifies the processes of buying and selling. Natural and objective disadvantages of investment in Google Inc. are a certain level of uncertainty and lack of long-term guaranteed income. However, such shortcomings are common in the entire area of investment, regardless of the historical success of a corporation. However, taking into account the dynamics of the growth of Google, the riskiness of losses seems improbable. Google Inc. is a target for profitable investment.
There are some factors that may affect the positive decision to invest in Google Inc. Investors can significantly reduce the risk of their investments due to diversification. By investing in an investment fund or stock, they can spread their investments among various financial instruments. While some investments fall in value, others are likely to rise, which evenly distributes the risk among investment in Google Inc. and other attractive businesses.
High liquidity of the company’s shares allows converting investments into cash quickly and without losses. Selling the shares can be just as easy as dealing with the shares of another company, but the corporation adequately satisfies the interests of its shareholders. The availability of the corporation’s shares permits investing from the most accessible sources. This provides investors with certain freedom of action. Moreover, investing in the corporate capital does not require additional studies of the company’s activities as it demonstrates its activity quite openly and transparently. This is displayed in regular mapping of outcomes of financial and investment activities. It is enough for the investor to follow the results of investment efficiency.
Professional management of the corporation belongs to the advantage of Google Inc., which attracts a large number of investors. Investment funds are managed by a team of professionals. They have more experience, knowledge, and information than an average investor. Herein, it is very important for making a decision to buy or sell. However, it should be remembered that not all investment in the company regularly show satisfactory results. However, the decline in investment activity can be attributed to the behavior of business in the market.
Investor Profile and Strategy
In order to start investing, it is necessary to have something to invest. Creation of the necessary initial capital precedes the establishment of an appropriate person and profile of an investor. Investments in a corporation are accompanied by high business activity and a large number of corporate bonds. Its work concerns the attraction of large-scale business and international operations. Therefore, investors should possess professional knowledge in the area of investment. These professionals are divided into speculators and managers. Speculating investors receive income from the difference between the purchase and sale in the short term. Their main task is to buy cheaper stocks and sell them at the highest price. Such investors are characterized by a large number of transactions within a short period. The main characteristic of such investors is risk exploitation of their money.
The managing investor of Google takes the finances of other people under control. As a rule, it is a legal entity or an individual entrepreneur providing their services free of charge. Their task is to multiply the investment funds. This person is well versed in the laws of the market, has a specific strategy, the necessary knowledge, and experience. A manager may also perform a large number of sales transactions of stock during a day, but their main difference from the speculator is that they risk other people’s money. There are certain laws regulating the activities of such persons or organizations. Therefore, it is expedient for the investor without sufficient funds for independent investment to give their funds to the specialist.
There is an opportunity to attract investment by non-professionals. These are investors for whom investment is not a professional occupation. In this case, they should make maximum efforts and try to track the profitability of the position as an investor. An independent investor without professional knowledge and skills is the type of an investor who prefers to manage their savings at their own discretion.
They make their own decisions about the objects of their investment and identification of a worth toolset. Moreover, they fully assume all risks associated with this activity. Their difference from professional investors is that investment is non-professional and additional activity. Their position is weaker when compared with professional and experienced investors. They carry out a small number of transactions and prefer to make long-term investments with a periodic review of their investment portfolio.
Characteristics of the most suitable investor involve a different level of investment activity and its management. Long-term investment is best suited for passive investors who hold the strategy of retention of the acquired equity. It would be a good strategy, but in times of crisis, it is possible to lose more than half of the capital.
Search of short gains may attract active investors who manage a portfolio and perform purchasing and selling operations on the shares of Google Inc. This is an active investing strategy. It can follow the portfolio of a passive management strategy. For example, active investors may buy the shares of Google Inc. and make short sales. However, this strategy should be accompanied by a major focus on stock selection. This type of investors is characterized by a relaxed attitude to a temporary fall in the market, of course, except for a crisis condition, as well as the ability to wait for favorable moments for a long time. Active investors may abandon a perpetual (long) investment and balance investments each year.
The time horizon of investment of Google’s investors includes long-term investors with investment horizon of more than 10 years, with medium-term investment horizon of 3 to 5 years, and short-term investments with a maturity from 1 to 3 years. However, higher possibility of a successful return on investment is inherent to long-term investors, as the company of the most demanded segment of the market successfully implements strategic plans and large enterprise operations.
Regarding the degree of risk tolerance, the most suitable investors for Google are moderate investors. They do not engage in frequent speculations and are not afraid to change the structure and volume of investments in the event of market fluctuations.
Such investors adhere to the following problems of the investment strategy:
- Preserve capital during following years;
- Gradually increase the capital;
- Earn high profits (Holburn & Zelner, 2010).
Strategy is the main reference point behavior for investor in different situations. However, if an investor prioritizes high earning before capital preservation, it is the way for defeat. Therefore, the investment strategy should vary, depending on the overall success of Google Inc.
Thus, the simplest and most effective strategies that can be applied with respect to Google Inc. as separate alternatives and components of the overall strategy are the following:
A strategy of dividends
The essence of this technique is very simple. The investor buys the stock at or before closure of the register of shareholders in order to gain profit from the issuing company in the future (Lin & Pavlova, 2006).
A long-term investment strategy
Many investors try to use the shares of Google Inc. in the long run, buying them for a period not less than one year. This strategy is simple, but it is very attractive due to its potential returns. In addition, this approach allows investors at least to partly diversify their risks. The main difficulty is the selection of the period of stable growth of the corporation, as it will bring profit to its owners. If there are doubts about profitability, they may form a portfolio, taking into account the yield of the stock market index. The resulting profit will be proportional to the growth of this indicator.
A strategy for medium-term investment
The shares are purchased for a few months. The base of the profit is the fluctuations in the value of the securities. An investor can buy the stock cheaper and sell it when the price is at its peak (Pike & Neale, 2006). However, the determination of the date of purchase or sale requires a fundamental and technical analysis of the situation, forecast of the market movement, and a rapid response to its changes.
Financial Ratios and Health of Google Inc.
Financial ratios of Google Inc. are relative measures of financial performance of the corporation that express the relationship between appropriate dynamic parameters and form the basis of financial management and the practice of evaluation of the financial health and indicators of Google Inc. In order to assess current financial condition of Google Inc., a set of coefficients comparing the dynamics of these indicators is used. The factors beyond the standard values or a negative trend characterize particular weak points of the company.
The investors interested in short-term efficiency of Google Inc. prefer a low level of current ratio as it eliminates their common risks and improves the business utilization of corporate resources. Current ratio was 4.75 in September, 2013, while next year demonstrated its decline to 4.47 in September, 2014. In 2015, its indicator was 4.77 (YCharts, 2015). Therefore, this ratio increased during the last three years by 0.2. That means that the corporation did not sufficiently use its current assets to cover its short-term liabilities and obligations.
Exclusion of inventories from the assets of Google Inc. allows determining the liquidity of the corporation and its ability to quickly cut the debts with marketable securities and cash. This indicator was 4.58 in December, 2013. Later, it increased to 4.80 in December, 2014. Liquidity capacity decreased to 4.77 in September, 2015 (GOOGL Quick Ratio, 2015). Therefore, this ability of Google Inc. to quickly turn particular assets into cash to pay obligations in the short run was slightly decreased.
Earnings per share determine the volume of earnings per outstanding share of Google Inc. The corporation identifies this indicator for shares of class A, B, and C. Obtain earnings per basic class A and B were $ 19.13 in 2013, which increased to $ 20.9 in 2014 (Investor Relations, 2015). The third quarter of 2015 identified $ 5.80 per share that was more by $ 0.64 than in the first quarter of the same year. In contrast to basic earning, its diluted alternative simultaneously increased. In 2013, EPS was $ 18.7 that increased to $ 20.5 in 2014. Later, the third quarter of 2015 demonstrated its annual growth to $ 5.7 per share.
Similar trends characterize dynamics of basic earnings per class C share that was $ 19.1 in 2013 and increased to $ 20.9 in 2014 (Investor Relations, 2015). This earning increased to $ 5.8 at the turn of 2015. Diluted earning per this type of share was $ 18.7 in 2013 and increased to $ 20.5 in 2014. Despite certain growth of EPS in the second quarter of 2015 to $ 6.4, this indicator was still higher by $ 0.63 at the turn of 2015 than at the beginning of the year. The third quarter of 2015 determined its growth to $ 5.7 per share.
The valuation of a share is executed through the ratio of the price of a share and earning per share. This ratio decreased from 29.4 in 2013 to 24.99 in 2014 (GOOGL P/E Ratio, 2015). Nevertheless, Google Inc. increased this ratio to 33.7 in December, 2015. These changes mean that it will take fewer years. to earn the price back for the company’s stock. In this case, short- and median investors are not in advance comparing to long-term investors, who are more interested in higher P/E stock.
Total revenues of Google Inc. increased from $ 55 billion in 2013 to $ 66 billion in 2014, while the third quarter of 2015 confirmed the annual growth to more than $ 18 billion in 2015 (Investor Relations, 2015). These changes were conditioned by the structural growth of revenues from the basic activities of Google Inc., such as its own and network members’ websites and other sources. Thus, the most rapid and positive growth concerned the revenues of its own websites. The annual growth rate was a slight increase by 1 percent. The revenues generated in the area of the websites of network members declined by 5 percent from 2013 to the third quarter of 2015. Other revenues increased by 2 percent from 2013 to 2015. The ratio of cash with regard to debt showed that the company could easily pay off its debt with the exceeding amount of cash that increased from 11.2 in 2013 to 12.3 in 2014 (Guru Focus, 2015). Later, the ratio sharply increased to 13.9 in September, 2015. Therefore, the company had significant liquid resources to cut its debt.
The level of profitability of Google Inc. attested gradual increase of total net income from $ 12.7 billion in 2013 to $ 14.1 billion in 2014. Net income slightly increased to $ 3.9 billion at the turn of 2015. Therefore, the activity of Google Inc. has been profitable in these last years due to advantageous business directions and wide expansion throughout the world. The financial condition of the corporation is defined by its ability to finance its activities. It is characterized by the provision of financial resources necessary for normal functioning of the company, their proper placement, and efficiency of use, financial relations with other legal entities and individuals, solvency, and financial stability.
Financial state of Google Inc. is sustainable. The company’s ability to make payments timely to finance its activities demonstrates its good financial condition. It depended on the results of its industrial, commercial, and financial activities. Production and financial plans are successfully carried out, which has a positive effect on the financial position of the corporation, increase of profits, and solvency. In turn, a strong financial position has a positive effect on the execution of corporate valuation, forecasting activities, decisions on capital structure etc.
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Risk Level of Google Inc.
Investment risk is a possibility or likelihood of full or partial failure to reach the results of the investment expected by investors. The activities of Google Inc. make investors face the following risks: specific (commercial) and regional risks.
Specific (commercial) risks are associated with the uncertainty of obtaining the expected commercial result from the implementation of a specific project. They relate to specific characteristics of the project itself or specific characteristics of the market conditions. Specific investment risks occur at the level of entrepreneurial activity of specific enterprises in the corporative composition of Google Inc.
Strategies and approaches to minimize these risks are the responsibility of the project developers and insurance companies that perform particular operations, depending on an investment project as well as the investment policy of Google Inc. The means of economic policy (fiscal, price, customs control, tariff) may indirectly influence risk reduction.
In addition, another risk is associated with limited investment opportunities in some regions, where the company is represented. To reduce this risk, Google may apply a strategy of selective incentives to increase investment activity and attract additional resources in appropriate regions. The total risk level of the company is affected by the capacity to unite all possible directions of the business and investment policy of the corporation. Investment risk may be maintained at low level through a proper policy of harmonious development of the business and rational utilization of its assets.
Recommendations for Investment Opportunity
In order to increase the appeal and interest of investors to Google, the corporation should improve the corporate strategies of those business units and the acquisitioned companies within its entrepreneurial structure. (Mackey, Mackey, & Barney, 2007). Herein, the company can be easily associated with a completed investment object.
Any prospect of crisis that may hurt the multinational global company requires strengthening of competitive advantages, ongoing liquidity, and accessibility of the capital for investment even in complicated economic conditions (Campello, Giambona, Graham, & Harvey, 2011). Google Inc. would facilitate its business sustainability and enhance its own investment attractiveness in crisis.
To sum up, Google Incorporated employs all possible measures to remain a successful target for investment. It was chosen for this financial analysis due to a range of factors determining its priority for an investor. The financial analysis revealed its stable financial health and efficient financial ratios. Successful performance faces challenges of financial and regional risks that should be reduced through a set of improvements and advancements related to the business practice of Google Inc.