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Commentary

Why Google Is Better Than It Looks

Shares looked modestly undervalued as management’s investments are masking the potential for operating margin expansion, writes Morningstar’s Rick Summer.

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 Google (GOOG) announced fourth-quarter results that were modestly ahead of our forecast for revenue and earnings and exited 2014 continuing to invest heavily in its employee base (through salary and stock compensation), data center capacity, real estate, and general research and development. We are sticking with our $600 fair value estimate and consider the shares modestly undervalued as of the earnings call. Our wide moat rating is unchanged.

Revenue grew 10.5% versus 2014 to $18.1 billion, although foreign currency had a negative impact of approximately 3.4%, excluding the contribution of the company's hedging program. Management called out particular strength in its mobile and programmatic advertising businesses, although it shared very little in the way of metrics for either segment. Google sites (which includes company-owned and -managed websites such as Google Search and YouTube) continue to be the engine, growing 18% versus 2014 excluding traffic acquisition costs. Even as Google's business matures, we expect the company to benefit as the digital advertising sector grows in the double digits over the next five years, according to our estimates.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.