Does Google's Stock Split Mean More Upside Potential?

Google   is positioned to do well in the long run. The company's decision to sell off the Motorola Mobility unit will drive its operating earnings higher. In addition, the company's recent stock split will drive the share price even higher.

Strong fundamentals
Last quarter, Google's stand-alone revenue grew 22% year-over-year to $15.7 billion, demonstrating that the company's revenue growth rate isn't showing signs of slowing, in spite of its relatively big size. In 2013, operating income was $13.97 billion, indicating an EBIT margin of 23.3%. Google's net income for the full year was $12.9 billion, which represents a margin of 21.6%.

Google's diluted EPS increased 18% year-over-year to $38.13 in 2013. As the company continues to expand, more revenue is being generated from overseas markets; in the last quarter, only 56% of revenue came from outside of the U.S. Google's operating cash flow for 2013 stood at $18.7 billion, a 12% year-over-year increase.

Google sold off the Motorola Mobility business to Chinese PC maker Lenovo for $2.9 billion. Motorola's negative operating earnings hindered Google's operating income for several quarters, so this asset divestiture should lead to operating margin expansion. The search giant's cash balance stood at $59 billion at the end of 2013, which the company can utilize to make more strategic acquisitions.  

The future looks bright
Continued strength in search, and heavy investments in YouTube, Android, Chrome, and Enterprise, will drive substantial upside for Google's revenue and free cash flow. The search giant generated $11.3 billion in free cash flow in 2013, and going forward, the company has an even greater capacity to earn significantly higher free cash flow. Of course, this is contingent upon its capital expenditures. 

Google's other revenue, which includes both hardware sales and earnings from the Google Play store, grew 111% year-over-year to $4.97 billion in 2013. According to IDC, the Android OS holds 78.1% of the mobile OS market share, which illustrates the overwhelming dominance of the company's mobile operating system. Google's enhanced campaigns, which help companies to build advertising campaigns across desktop and mobile platforms, has been resonating well with advertisers. 

Google's share of the U.S. search engine market remains steady at 67.5%, while Microsoft held an 18.4% share in February 2014, according to comScore. Microsoft has been doing well with a new CEO in place, and the market appears to have faith in management, as the company's stock price is near multi-year highs.  

On the last earnings call, Google's Nikesh Arora disclosed that YouTube has more than 1 billion monthly users and saw a 50% increase in daily viewing time in 2013; more than 6 billion hours of video are watched on YouTube every month. YouTube reaches more U.S. adults between the ages of 18-34 than any other cable network, according to Nielsen. These strengths are very good selling points for YouTube to gain even more brand advertisers from across the globe.

The company's core businesses, search and YouTube, are doing very well, as they appeal to different types of advertisers, utilizing both text and video ads.  As more marketers turn away from old media platforms to newer forms of digital media for fulfilling their advertising needs, Google stands to benefit from this trend. 

Going forward
Google's stock split into Class A and Class C shares gives more power to the company's founders and board. Management is very good, and no issues with corporate governance will arise. This lower-priced stock will also attract more investors into the fold, thus increasing the possibility of even more growth.

The company's strong revenue and free cash flow generation are major positives. Google's stellar positioning across numerous search, display, and video advertising types gives it a big advantage in gaining more revenue from online advertising. Google's decision to divest the cash-burning Motorola Mobility business will substantially aid its margins. Along with the stock split, this will benefit the company's stock price in the long haul. 

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Ishfaque Faruk owns shares of Facebook. The Motley Fool recommends Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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