The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) were down 0.06% and 0.08%, respectively, at 10:15 a.m. EDT. This is a huge day for corporate earnings, with Dow components General Electric, Goldman Sachs and UnitedHealth reporting today before the market opened, after fellow blue-chippers IBM and American Express rolled out their quarterly numbers following yesterday's close. I'm going to focus on another market-mover that reported yesterday afternoon, Google (NASDAQ:GOOG) (NASDAQ:GOOGL), which is more valuable than any of those Dow blue chips.
Google missed analysts' consensus estimates for both revenue and earnings per share; to be fair, at 0.7% under, the "miss" on revenue was really more of an "in line with." Furthermore, revenue came in 19% higher than in the year-ago period (22% higher if you consider revenue net of traffic acquisition costs) -- robust growth for a company that generated more than $62 billion in revenue over the trailing 12 months.
However, that growth did not fall through to the bottom line, as adjusted EPS grew by just 4.5%. The consensus in the financial media and the analyst community appears to be that the cost of Google's ventures outside of search are starting to mount, and that they are unlikely to yield the same fat margins as its core ad search franchise. Here's The Wall Street Journal's Heard on the Street column:
But being Google is getting more expensive, as the company ventures into new areas and invests aggressively to compete with a number of rivals such as Apple, Microsoft, and Amazon.com. Research-and-development spending jumped 31% year over year, which included the $3.2 billion acquisition of Nest Labs that Google hopes will catapult it -- eventually -- into the still-nascent home-automation market.
That must be equally true of Google's "moon-shot" projects, or as Pivotal Research Group's Brian Wieser put it, "Balloons over New Zealand will also have lower profit margins." Still, as Google CFO Patrick Pichette explained during yesterday's earnings call, once you remove the one-time legal cost and the M&A cost linked to the acquisition of Nest, expenses were in line with the company's aims.
Will Google's profit margin fall over time as the company expands its portfolio of activities beyond core search? Very likely, but this quarter's results show that the search business remains extremely profitable and still has plenty of growth left. No one -- and that includes new entrants in the online advertising world such Facebook and Twitter -- is currently better positioned to capture that growth than Google. Just under 20 times next 12 months' earnings-per-share estimate doesn't seem like an absurd price for that privilege -- it certainly looks like a better deal than the S&P 500 at 15 times.
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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Google-Class C Shares and Google (A shares). The Motley Fool owns shares of Google-Class C Shares and Google (A shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.