Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Google Flunks Basic Math

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Online giant Google (Nasdaq: GOOG  ) just reported fourth-quarter results, and investors aren't happy. Shares fell as much as 9.4% in after-hours action on epic trading volume.

What did Big G do to deserve a public spanking like that? Well, analysts had been looking for $10.51 of non-GAAP earnings per share on adjusted sales in the neighborhood of $8.4 billion. All Google could muster was $9.50 per share on revenue of $8.1 billion.

Granted, we're still looking at a 29% year-over-year revenue boost and 8.6% higher earnings per share. On the other hand, operating cash flows jumped 11%. Fools love to see this metric outpacing the accounting construct we call earnings, because cash is a lot harder to fake.

Also, Google never offers financial guidance, so analysts are left to their own devices more than they're used to. But still, that's the Greek chorus that Google must please or else face downgrades and/or angry research notes. These things really do move share prices.

CEO Larry Page doesn't think the quarter was all that bad, of course. "Google had a really strong quarter ending a great year," he said, and Page is also "super excited about the growth of Android, Gmail, and Google+."

Google users clicked on 34% more ads than they did a year ago, though each click generated 8% less revenue. If Google had been able to cut that per-click revenue drop to 4%, the company would have met Street targets. Managing this metric is the key to Google's future profitability.

True to form, management didn't break out results like Android-related revenues or YouTube sales, and I doubt that the earnings call will shine much light on these details. But Page did mention that Google+ more than doubled to 90 million users in just three months. Not too shabby, I say. That project is looking more central to Google's modus operandi every day, so a strong user base is a good sign.

This setback erased the gradual gains of the past three months in one fell swoop. As a Google investor, I'm keeping a somewhat nervous eye on that cost-per-click metric, but by and large I see no reason to dump my shares.

On the other hand, shares are now trading for just 18.7 times trailing earnings. Given that the company sees annualized EPS and cash flow growth around 30% more often than this single-digit anomaly, I think the stock is a steal at these prices. But if you still don't like Big G even at this discount, there are other ways to invest in the tremendously successful Android platform. This free report will show you how.

Fool contributor Anders Bylund owns shares of Google but holds no other position in any of the companies mentioned. The Motley Fool owns, and Motley Fool newsletter services have recommended buying, shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2012, at 9:18 AM, TMFJoeInvestor wrote:

    Hey Anders,

    Google isn't trying to manage a metric -- it is trying to maximize total revenue. Management explicitly stated on the conference call that they confirmed via testing that they could maximize total revenue by trading lower CPC's for higher clicks. That's not a miss, but good business. In any case, I agree that the shares look like a great pick up right now.



Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1761657, ~/Articles/ArticleHandler.aspx, 10/24/2016 3:25:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
GOOGL $824.06 Up +2.43 +0.30%
Alphabet (A shares… CAPS Rating: *****