The Dow Could Use Some of Google's Secular Growth

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

If you were to look at today's stock market level in isolation, you'd be forced to conclude that the October government shutdown and run-up to the debt ceiling deadline did nothing to harm investor confidence. Indeed, the S&P 500 gained 0.7% to finish at an all-time high. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) finished flat, hamstrung by two of its top components; the index remains 1.9% below its record high, set on Sept. 18.

Pity the Dow -- as a price-weighted index, it cannot add Google (NASDAQ: GOOGL  ) , because its nearly $900 stock price would automatically give the search company's stock too heavy a weighting. That's a shame, because the Dow could have used the 8.2% pop Google shares experienced in the after-hours session, after announcing solid results for the third quarter:

  • Consolidated revenues rose 12% year on year to $14.89 billion, surpassing analysts' forecast of $14.79 billion.
  • Excluding certain items, the company earned $10.74 per share, ahead of the $10.34 analysts were looking for, and 21% above the year-ago figure.

Although the shift from PCs to mobile devices is a challenge for any company involved with online advertising, Google -- like competitor Facebook (NASDAQ: FB  )  -- appears to be navigating the transition very successfully. While its average cost-per-click – the rate Google charges advertisers – fell 8% in the third quarter, the 26% increase in the total number of paid clicks more than made up for it.

Compare that growth with the revenue record of two of the three Dow components that contributed the heaviest point losses today. Reporting yesterday, IBM (NYSE: IBM  ) announced its sixth consecutive quarter of declining revenues, with a 4% year-on-year decline in the third quarter. Meanwhile, Goldman Sachs said this morning that revenues dropped 20% in the third quarter, thanks largely to a 44% contraction in revenues in its Fixed Income, Currency and Commodities unit.

Goldman is in a cyclical business, to be sure; but aren't IBM and Google in the same sector, at least nominally? "Nominally" is the operative word: Online advertising remains an area of secular growth, whereas the rate of growth in the industry IBM operates in -- corporate software and services -- is closely tied to that of broad economic activity. According to data from S&P Capital IQ, third-quarter sales for the S&P 500's Information Technology sector are expected to grow 2.9% year on year, in line with the expected 3.3% increase for the index as a whole.

Still, Google's numbers are promising for Facebook, which reports its third quarter results on Oct. 30 -- and for micro-blogging site Twitter, which is revving up for its highly anticipated IPO.

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