Google's Results Are No Disappointment

U.S. stocks rose for a third straight day on Wednesday, putting them back within 1.5% of their early April all-time high. The benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) both gained 1%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) rose 1.2%; that performance was helped by Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) , as the A shares and C shares were up 2.8% and 3.8%, respectively, in advance of the company's first-quarter results (both share classes are currently included in the index -- the A shares will be removed before the market open on June 23). However, if the price action in after-hours trading is any indication, Google shares will be an anchor on the index tomorrow, after the company's results disappointed. The same effect looks likely from another tech heavyweight, IBM, which also reported disappointing results after the close.

All right, yes, Google missed Wall Street's expectations on both revenue and earnings per share, but let's put those misses in perspective by arranging them next to year-on-year growth:

Metric

Miss Relative to Analysts' Consensus Estimate (%)

Year-on-Year Growth (%)

Revenues

0.7%

19.1%

Earnings per share (adjusted)

2.2%

4.5%

Source: Company documents, S&P Capital IQ.

Year-on-year revenue growth of 19% is pretty impressive for a company that just rang up $15.4 billion in quarterly revenues! Crucially, however, the two key variables that drive Google's revenues, the number of "paid clicks" and the "cost per click" (the average amount advertisers pay Google per click), had opposite effects on overall growth. Indeed, the number of paid clicks rose sharply (26%), while the cost per click declined by 9%.

It appears that, as users transition from laptops to mobile devices, they are still clicking on ads, but their clicks are becoming less valuable, i.e., from the advertiser's point of view, it takes more clicks to close a sale. It's not difficult to imagine, for example, that consumers may be more reluctant to purchase bigger-ticket items on a mobile device (particularly a phone) compared with a laptop or desktop, as the smaller screen doesn't lend itself as well to research and due diligence.

Nevertheless, Google Chief Business Officer Nikesh Arora struck a confident tone on that front on the earnings conference call, arguing that mobile has the benefit that advertisers know more about the user. As users -- and companies -- become more focused on mobile platforms, it's becoming easier to close sales there. The upshot? Google is confident that mobile will improve.

While we're on the topic of understanding Google's business, because ad revenues are the business, the company will, beginning with the next set of quarterly results, break out paid clicks and cost per click by network and site, in addition to the aggregate figures. For investors, more data is no bad thing (up to a point, after which you need a search engine).

All told, this doesn't at all look like a bad quarter, and the after-hours reaction (down roughly 3% as of 6:30 p.m. ET) looks like somewhat of an overreaction. At 20.7 times the next 12 months' earnings-per-share estimate, Google's shares look like they offer adequate value -- they certainly deserve a premium to the broad market.

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  • Report this Comment On April 16, 2014, at 9:35 PM, digitek wrote:

    I think another angle here is a large portion of the clicks on mobile are by accident. The touch-scroll or touch-zoom mechanic on a phone/tablet often lends to accidentally touches (clicks) on ads, followed by immediately leaving/closely that linked page. Advertisers can likely see this pattern in their ad-based visits and want a better pricing model to reflect true click-through rates. I think users also find mobile ads on their phone more intrusive, since the screen real-estate is proportionally larger than a desktop browser, lending to more irritation and accidental clicks.

  • Report this Comment On April 16, 2014, at 9:54 PM, zippero wrote:

    Google's capex rose to a record $2.4 billion, about 70% of Google's $3.5 net income. Capex has been exploding from 30% of net income a year ago to 70% now and on its way to 100% a year from now. What's all this capex for? Low-margin, capital-intensive cloud data centers to pursue price wars with Amazon, MSFT, etc. in the stupid cloud business which is the polar opposite of Google's asset-light core advertising business in terms of margins and capex requirements. What's the point of having high margins from its core monopoly advertising business if ultimately all these wonderful profits are going to get consumed by low-margin capital-intensive cloud boondoogle?

  • Report this Comment On April 16, 2014, at 9:56 PM, zippero wrote:

    Core searchword advertising is a one-in-a-billion business whose awesome financial characteristic in terms of high margins and low capex requirements will never be rivaled by any other "moonshot" business Google ever decides to pursue, which are all cash-wasting hogs at the end of the day.

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