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Currency, Investment Headwinds Don't Curb Our Enthusiasm for Google

Short-term issues are weighing on Google's top and bottom lines, but we still think the wide-moat firm remains a compelling investment at today's stock price.

Total revenue grew 12% to $13.9 billion, but the currency impact made for a 5% headwind. This strong constant currency growth outpaces our estimate for 2015 industrywide digital advertising growth, primarily because Google provides advertisers a unique capability to better target advertising in a scalable way, in our view. Clearly, the crown jewels are Search and YouTube, as Google-owned properties generated 68% of overall revenue, growing 14% on a GAAP basis. Other initiatives, such as Google Play, Nest, and Google Cloud continue to be small contributors that are adding little to the top or bottom-line results.

Operating margins reflected continued heavy investment, particularly in engineering and product development personnel. Still, operating margins were 25.8%, only 90 basis points lower than 2014. We continue to believe the discretionary nature of Google's investments masks its true earnings power. We estimate the firm could deliver operating margins of approximately 30%, excluding the additional R&D expense allocated towards new initiatives. Our long-term model is slightly more conservative, reaching a 28% operating margin by 2019.

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About the Author

Rick Summer

Strategist

Rick Summer, CFA, CPA, is a technology strategist for Morningstar, responsible for Internet and technology research. Before assuming his current position in 2014, he was a senior equity analyst. He joined Morningstar in 2005 as an equity analyst, covering software and Internet companies. He has operating experience in the wireless and software infrastructure industries and has worked as a private equity investor for UBS Global Asset Management.

Summer holds a bachelor’s degree in business administration from Emory University and a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant (CPA).

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