Google innovations, drones and glass, justify valuation

How do you grow $13 billion more than 20% a year? That’s a question facing investors ahead of Google’s, $GOOG, $GOOGL, earnings Wednesday, after the bell. And it’s one that a majority of investors on believe the world’s dominant search engine can answer.

Sentiment on the stock is 65% bullish. Many cashtaggers believe that Google’s growth warrants its price to 2015 estimated earnings ratio of 17, based on GOOGL’s $545.20 share price at Monday’s close.

5/Companies can grow into the valuation over time like @Google $GOOG

— Y CHARTS (@ycharts) Apr. 14 at 04:55 PM

Most of Google’s growth will come from advertising. Last quarter, Google grew its Google sites revenue, which primarily consists of search advertising, by 22% from the prior year to $10.6 billion. It made a total of $12.92 billion in net income last year.

But Google is so big now that it can’t rely on advertising alone to justify its multiples. The digital advertising market is expected to be $121 billion this year and grew about 16% from the prior year, according to a report released this month by ZenithOptimedia, a unit of ad giant Publicis. And there is more competition for those dollars with social media giants like Facebook, $FB, and Twitter, $TWTR, vying for a bigger slice of the pie. Screen Shot 2014-04-14 at 11.02.22 PM

Google is working to grow its non-advertising revenue beyond last quarter’s $1.65 billion—or 10% of sales. Today, it began selling Google Glass, its Internet and video enabled glasses, albeit only for one day. The price is $1,500. Screen Shot 2014-04-15 at 7.40.41 AM

Late last night, the Wall Street Journal reported that Google had purchased drone maker Titan Aerospace, presumably to improve its map product but also to expand Internet availability to folks worldwide, thus helping to grow the online advertising market faster than ZenithOptimedia and others predict. Titan Aerospace confirmed the deal on its web site.

Google Inc Buys Drone Maker That Facebook Inc Was In Talks With $GOOG $GOOGL $FB

— ValueWalk (@valuewalk) Apr. 14 at 04:03 PM

The ecosystem keeps increasing in size, are there limits to how far they are ready to take things? $GOOG buys drones

— IntelligentSpec (@IntelligentSpec) Apr. 14 at 02:56 PM

Google has also aggressively moved into mobile and, not so aggressively, into payments. Google Wallet, unfortunately, is a bit of an also ran in the e-payments space. But, Google’s Droid phones gained considerable market share from Apple, $AAPL, iPhones, and now are the dominant handsets.

Samsung Galaxy S5 Sold Out In Several Markets Worldwide $GOOG @VALUEWALKTECH

— ValueWalk (@valuewalk) Apr. 14 at 03:08 PM

Despite Google’s efforts at diversification, some investors maintain that the search giant is still primarily an advertising shop and, given its size, can’t keep growing faster than the online ad market. Some bullish investors bought protection against an earnings miss this week.

$GOOG in the event that we see a miss Wednesday AH, I jumped into some $QQQ puts, I looked at the Google puts but to rich for a coin flip!

— Delta Force (@DF_Options) Apr. 14 at 08:01 PM

But most investors believe Google keeps innovating—and using its cash to acquire innovation. And it just needs one new business to take off in order to support its $366.43 billion valuation.

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