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Google Shares Look Attractive

Robust demand in its core business and stronger expense discipline make the wide-moat tech firm’s shares look like a bargain today, writes Morningstar’s Rick Summer.

Total revenue grew 11% (18% on a constant currency basis) to $17.7 billion, while revenue excluding traffic acquisition costs grew more than 13%, as the firm realized strong top-line growth even as it de-emphasized payments to distribution partners, including Mozilla as a premier search provider. As users migrate to mobile devices, where they can choose to use applications as opposed to browsers and search, Google's results demonstrate the importance of Internet search in the overall advertising value proposition, in our view. The significance of Internet search and Google's wide moat in the online advertising sector remain key inputs to our investment thesis.

Our model assumes meaningful operating margin expansion over the intermediate term, and the quarter delivered on that front as well. GAAP operating margins expanded 50 basis points versus 2014 and 140 basis points sequentially, to 27.2%, benefiting partially from lower legal expenses as well as modest sales and marketing leverage. Although we expect reasonable noise around operating margins from quarter to quarter, we forecast continued operating margin expansion over the next several years.

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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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